BlackRock Advisors, LLC, et al., 23005-23007 [2018-10499]
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Federal Register / Vol. 83, No. 96 / Thursday, May 17, 2018 / Notices
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NYSEARCA–2018–28 and
should be submitted on or before June
7, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.25
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–10501 Filed 5–16–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Advisers Act Release No. 4912;
803–00240]
BlackRock Advisors, LLC, et al.
May 11, 2018.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice.
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AGENCY:
Notice of application for an exemptive
order under Section 206A of the
Investment Advisers Act of 1940 (the
‘‘Act’’) and Rule 206(4)–5(e).
APPLICANTS: BlackRock Advisors, LLC,
BlackRock Financial Management, Inc.
and BlackRock Fund Advisors
(Collectively the ‘‘Applicants’’ or
‘‘Advisers’’).
RELEVANT SECTIONS OF THE ACT:
Exemption requested under section
206A of the Act and rule 206(4)–5(e)
from rule 206(4)–5(a)(1) under the Act.
SUMMARY OF APPLICATION: Applicants
request that the Commission issue an
order under section 206A of the Act and
rule 206(4)–5(e) exempting it from rule
206(4)–5(a)(1) under the Act to permit
Applicants to receive compensation
from certain government entities for
25 17
CFR 200.30–3(a)(12) and (59).
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investment advisory services provided
to government entities within the twoyear period following a contribution by
a covered associate of the Applicants to
an official of the government entities.
FILING DATES: The application was filed
on May 26, 2017, and amended and
restated applications were filed on
November 21, 2017 and March 28, 2018.
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
Applicants with a copy of the request,
personally or by mail. Hearing requests
should be received by the Commission
by 5:30 p.m. on June 5, 2018, and
should be accompanied by proof of
service on Applicants, in the form of an
affidavit or, for lawyers, a certificate of
service. Pursuant to rule 0–5 under the
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.
Applicants: BlackRock Advisors, LLC
and BlackRock Financial Management,
Inc., 55 East 52nd Street, New York, NY
10055 and BlackRock Fund Advisors,
400 Howard Street, San Francisco, CA
94105.
FOR FURTHER INFORMATION CONTACT:
Rachel Loko, Senior Counsel, or Holly
Hunter-Ceci, Assistant Chief Counsel, 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
website at https://www.sec.gov/rules/
iareleases.shtml or by calling (202) 551–
8090.
Applicants’ Representations
1. Applicants are registered with the
Commission as investment advisers
pursuant to the Act. BlackRock, Inc.
(‘‘BlackRock’’) is the parent company of
the Advisers. Applicants act as advisers
to registered investment companies and
investment companies exempt from
registration under the Investment
Company Act of 1940.
2. The individual who made the
campaign contribution that triggered the
two-year compensation ban (the
‘‘Contribution’’) is Mark Wiedman (the
‘‘Contributor’’). The Contributor is a
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Senior Managing Director at BlackRock,
the head of BlackRock’s ETF and Index
Investments business, and a member of
BlackRock’s Global Executive
Committee. BlackRock’s ETF business
focuses on selling interests in RICs
directly to investors, including certain
government entities, which is not
covered business under rule 206(4)–5.
However, Applicants submit that, as a
member of BlackRock’s Global
Executive Committee, the Contributor
is, and at the time of the Contribution
was, an executive officer of the Advisers
under rule 206(4)–5(f)(4), and thus by
definition is and at all relevant times
was a covered associate pursuant to rule
206(4)–5(f)(2)(i).
3. Certain Ohio government entities
have selected mutual funds (‘‘RICs’’)
advised by BlackRock Advisors, LLC
and BlackRock Fund Advisors to be
options in their participant-directed
plans and one Ohio government pension
plan has invested in an unregistered
fund managed by BlackRock Financial
Management, Inc. Such government
entities, are ‘‘government entities’’ as
defined under Rule 206(4)–5(f)(5) and,
throughout the application, are referred
to individually as a ‘‘Client’’ and
collectively as the ‘‘Clients.’’
4. The recipient of the Contribution
was John Kasich (the ‘‘Official’’), the
Governor of Ohio, in his campaign for
President of the United States. The
investment decisions of each Client are
overseen by a board of trustees or
directors (the ‘‘Board’’ or the ‘‘Boards’’),
to which the Governor appoints certain
members. The Applicants submit that
due to the power of appointment, the
Governor is an ‘‘official’’ of each Client
under rule 206(4)–5.
5. The Contribution that triggered rule
206(4)–5’s prohibition on compensation
under rule 206(4)–5(a)(1) was made on
January 15, 2016 (‘‘the Contribution
Date’’) for the amount of $2,700 to the
Official’s campaign for President of the
United States via credit card to attend
a lunch hosted by the campaign at the
invitation of a business acquaintance
who was an independent director of a
BlackRock fund and who shared the
Contributor’s personal political views.
Applicants submit that the Contribution
was not motivated by any desire to
influence the award of investment
advisory business. Applicants represent
that in addition to being entitled to vote
in the presidential election, the
Contributor was interested in the GOP
presidential primary. Aside from a brief
introduction while Governor Kasich
welcomed a group of attendees at lunch,
the Contributor has never met the
Official or dealt with the Official or his
staff in any capacity. Moreover, the
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Contribution is consistent with other
contributions made by the Contributor
over the years. Applicants state that the
Contributor made the Contribution
without pre-clearance from BlackRock’s
Legal department. Applicants also
represent that at the time he attended
the campaign lunch where he made the
Contribution, the Contributor was
focused on the Official in his capacity
as a candidate for President of the
United States, and the potential that a
contribution to such a federal candidate
would be covered under rule 206(4)–5
simply did not occur to him in that
frame of mind. The Contributor never
told any prospective or existing investor
(including the Clients) about the
Contribution, and did not discuss the
Contribution with BlackRock, the
Advisers or any of their covered
associates.
6. The initial selection process
pursuant to which each Client decided
to invest in a fund advised by an
Adviser or to select a RIC advised by an
Adviser as an investment option in a
participant-directed plan, as applicable,
had been completed before the
contribution was made. Applicants state
that the Contributor had no intention to
seek, and no action was taken by the
Contributor or the Applicants, to obtain
any direct or indirect influence from the
Official or any other person with respect
to those investments. The Contributor
did not participate in any capacity in
soliciting those investments or any other
investment advisory business covered
under rule 206(4)–5 from any
government entity.
7. The Contribution was discovered
on October 6, 2016 by Blackrock’s
Compliance department in the course of
internal compliance testing.
Specifically, Blackrock discovered the
Contribution after a routine search on
the Federal Election Commission’s
website. The Contributor requested a
refund of the full $2,700 on November
11, 2016 and received a refund on
November 23, 2016. Applicants
represent that all compensation earned
that is attributable to the Clients’
investments since the Contribution Date
has been placed in escrow pending the
outcome of this Application.
8. BlackRock’s political contribution
policies and procedures (the ‘‘Policy’’)
which apply to BlackRock as well as its
subsidiaries, including the Advisers,
were adopted and implemented in order
to coincide with the effective date of
rule 206(4)–5, well before the
Contribution was made. The Applicants
submit that at the time of the
Contribution, the Policy required, and
continues to require, that all employees
pre-clear all political contributions
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made in the United States. There is no
de minimis exception from the preclearance requirement. Under the
existing Policy, BlackRock requires
employees to certify annually to their
compliance with the Policy, sends
reminders about the Policy and its preclearance requirement twice every year,
and requires all employees to complete
an annual computer-based training
module that addresses the Policy and its
pre-clearance requirement. In addition,
BlackRock periodically conducts
searches of public websites for
contributions made by employees.
Applicants’ Legal Analysis
1. Rule 206(4)–5(a)(1) under the 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 a
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
Official is an ‘‘official’’ as defined in
rule 206(4)–5(f)(6).
2. Section 206A of the Act authorizes
the Commission to ‘‘conditionally or
unconditionally exempt any person or
transaction . . . from any provision or
provisions of [the 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 Act].’’
3. Rule 206(4)–5(e) provides that the
Commission may conditionally or
unconditionally grant an exemption to
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 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
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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. Applicants request an order
pursuant to section 206A and rule
206(4)–5(e), exempting them 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 twoyear period following the Contribution.
5. Applicants submit 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 Act. Applicants
further submit that the other factors set
forth in rule 206(4)–5(e) similarly weigh
in favor of granting an exemption to the
Applicants to avoid consequences
disproportionate to the violation.
6. Applicants contend that given the
nature of the Contribution, and the lack
of any evidence that the Advisers 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 Clients’ interests
are best served by allowing the Advisers
and their Clients to continue their
relationship uninterrupted. Applicants
state that causing the Advisers to forgo
the impacted compensation attributable
to the two-year period would result in
a financial loss of approximately $37
million or 13,700 times the amount of
the Contribution. Applicants suggest
that the policy underlying rule 206(4)–
5 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. Applicants represent that the Policy
was adopted and published well before
the Contribution was made. Applicants
further represent that, the Policy has
conformed to the requirements of rule
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206(4)–5 and has been more rigorous
than rule 206(4)–5’s requirements as
BlackRock has monitored compliance
with the Policy by searching for an
individual employee’s past political
contributions on the Federal Election
Commission’s database whenever an
individual makes a request to BlackRock
to pre-clear a contribution to a federal
candidate. Applicants submit that
BlackRock is in the process of
enhancing this monitoring protocol.
8. Applicants assert that at no time
did any employee or covered associate
of BlackRock, the Advisers or any of
their affiliates, other than the
Contributor have any knowledge that
the Contribution had been made before
its discovery by the Compliance
department in October 2016.
9. Applicants assert that after learning
of the Contribution and confirming the
Contributor’s covered status, BlackRock
caused the Contributor to promptly
obtain a full refund of the Contribution.
Applicants submit that in response to
the contribution, BlackRock has begun
the process of implementing
enhancements to the Policy that will
include (a) sending its employees,
including employees of its affiliates a
third annual reminder to pre-clear all
political contributions in the United
States, including those to federal
candidates (b) revising its annual
computer-based training module to
highlight the need to pre-clear all
political contributions in the United
States, including those to federal
candidates, and (c) enhancing its
protocol to monitor compliance with the
Policy’s pre-clearance requirements by
searching the FEC’s and certain states’
campaign finance databases for
contributions made by a sampling of
covered associates on a quarterly basis.
Finally, BlackRock’s Compliance
department will remind the Contributor
of the Policy’s pre-clearance
requirement on at least a quarterly basis.
10. Applicants state that the
Contributor is and has, at all relevant
times, been a covered associate of the
Advisers. Applicants note that the
Contributor has never solicited
investment advisory business covered
under rule 206(4)–5 from government
entities and has had no direct contact or
involvement with any of the Clients or
the members of their Boards regarding
any business matters.
11. Applicants assert that the Clients’
initial investments with the Advisers
substantially predate the Contribution.
They were done on an arm’s length
basis and the Contributor and the
Applicants took no action to obtain any
direct or indirect influence from the
Official.
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12. Applicants submit that neither the
Advisers 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. Applicants further submit
that there was no violation of the
Advisers’ fiduciary duty to deal fairly or
disclose material conflicts given the
absence of any intent or action by the
Advisers or the Contributor to influence
the selection process. Applicants
contend that in the case of the
Contribution, the imposition of the twoyear prohibition on compensation does
not achieve rule 206(4)–5’s purposes
and would result in consequences
disproportionate to the mistake that was
made.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–10499 Filed 5–16–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83220; File No. SR–CBOE–
2018–034]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the Marketing
Fee Program With Respect to the
Russell 2000 Index Options
May 11, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1, and Rule 19b–4 thereunder,2
notice is hereby given that on May 1,
2018, Cboe Exchange, Inc. (the
‘‘Exchange’’ or ‘‘Cboe Options’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend its
marketing fee program with respect to
the fee assessed on Russell 2000 Index
(‘‘RUT’’) options.
1 15
2 17
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00064
Fmt 4703
The text of the proposed rule
change is also available on the
Exchange’s website (https://
www.cboe.com/AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend its
marketing fee program with respect to
the fee assessed on Russell 2000 Index
(‘‘RUT’’) options. Currently, the
Exchange assesses the marketing fee on
RUT options at a rate of $0.30 per
contract. The Exchange no longer
wishes to assess the marketing fee to
RUT options. The Exchange notes that
the marketing fee is similarly not
applied to other Underlying Symbol List
A products, which group includes RUT.
The Exchange believes removing the
marketing fee will encourage greater
liquidity in RUT, which benefits all
market participants.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.3 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 4 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
3 15
4 15
Sfmt 4703
23007
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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]]>Agencies
[Federal Register Volume 83, Number 96 (Thursday, May 17, 2018)]
[Notices]
[Pages 23005-23007]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-10499]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Investment Advisers Act Release No. 4912; 803-00240]
BlackRock Advisors, LLC, et al.
May 11, 2018.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice.
-----------------------------------------------------------------------
Notice of application for an exemptive order under Section 206A of
the Investment Advisers Act of 1940 (the ``Act'') and Rule 206(4)-5(e).
APPLICANTS: BlackRock Advisors, LLC, BlackRock Financial Management,
Inc. and BlackRock Fund Advisors (Collectively the ``Applicants'' or
``Advisers'').
RELEVANT SECTIONS OF THE ACT: Exemption requested under section 206A of
the Act and rule 206(4)-5(e) from rule 206(4)-5(a)(1) under the Act.
SUMMARY OF APPLICATION: Applicants request that the Commission issue an
order under section 206A of the Act and rule 206(4)-5(e) exempting it
from rule 206(4)-5(a)(1) under the Act to permit Applicants to receive
compensation from certain government entities for investment advisory
services provided to government entities within the two-year period
following a contribution by a covered associate of the Applicants to an
official of the government entities.
FILING DATES: The application was filed on May 26, 2017, and amended
and restated applications were filed on November 21, 2017 and March 28,
2018.
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 Applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on June 5, 2018, and should be accompanied by proof of service on
Applicants, in the form of an affidavit or, for lawyers, a certificate
of service. Pursuant to rule 0-5 under the 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. Applicants: BlackRock Advisors, LLC and
BlackRock Financial Management, Inc., 55 East 52nd Street, New York, NY
10055 and BlackRock Fund Advisors, 400 Howard Street, San Francisco, CA
94105.
FOR FURTHER INFORMATION CONTACT: Rachel Loko, Senior Counsel, or Holly
Hunter-Ceci, Assistant Chief Counsel, 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 website at https://www.sec.gov/rules/iareleases.shtml or by
calling (202) 551-8090.
Applicants' Representations
1. Applicants are registered with the Commission as investment
advisers pursuant to the Act. BlackRock, Inc. (``BlackRock'') is the
parent company of the Advisers. Applicants act as advisers to
registered investment companies and investment companies exempt from
registration under the Investment Company Act of 1940.
2. The individual who made the campaign contribution that triggered
the two-year compensation ban (the ``Contribution'') is Mark Wiedman
(the ``Contributor''). The Contributor is a Senior Managing Director at
BlackRock, the head of BlackRock's ETF and Index Investments business,
and a member of BlackRock's Global Executive Committee. BlackRock's ETF
business focuses on selling interests in RICs directly to investors,
including certain government entities, which is not covered business
under rule 206(4)-5. However, Applicants submit that, as a member of
BlackRock's Global Executive Committee, the Contributor is, and at the
time of the Contribution was, an executive officer of the Advisers
under rule 206(4)-5(f)(4), and thus by definition is and at all
relevant times was a covered associate pursuant to rule 206(4)-
5(f)(2)(i).
3. Certain Ohio government entities have selected mutual funds
(``RICs'') advised by BlackRock Advisors, LLC and BlackRock Fund
Advisors to be options in their participant-directed plans and one Ohio
government pension plan has invested in an unregistered fund managed by
BlackRock Financial Management, Inc. Such government entities, are
``government entities'' as defined under Rule 206(4)-5(f)(5) and,
throughout the application, are referred to individually as a
``Client'' and collectively as the ``Clients.''
4. The recipient of the Contribution was John Kasich (the
``Official''), the Governor of Ohio, in his campaign for President of
the United States. The investment decisions of each Client are overseen
by a board of trustees or directors (the ``Board'' or the ``Boards''),
to which the Governor appoints certain members. The Applicants submit
that due to the power of appointment, the Governor is an ``official''
of each Client under rule 206(4)-5.
5. The Contribution that triggered rule 206(4)-5's prohibition on
compensation under rule 206(4)-5(a)(1) was made on January 15, 2016
(``the Contribution Date'') for the amount of $2,700 to the Official's
campaign for President of the United States via credit card to attend a
lunch hosted by the campaign at the invitation of a business
acquaintance who was an independent director of a BlackRock fund and
who shared the Contributor's personal political views. Applicants
submit that the Contribution was not motivated by any desire to
influence the award of investment advisory business. Applicants
represent that in addition to being entitled to vote in the
presidential election, the Contributor was interested in the GOP
presidential primary. Aside from a brief introduction while Governor
Kasich welcomed a group of attendees at lunch, the Contributor has
never met the Official or dealt with the Official or his staff in any
capacity. Moreover, the
[[Page 23006]]
Contribution is consistent with other contributions made by the
Contributor over the years. Applicants state that the Contributor made
the Contribution without pre-clearance from BlackRock's Legal
department. Applicants also represent that at the time he attended the
campaign lunch where he made the Contribution, the Contributor was
focused on the Official in his capacity as a candidate for President of
the United States, and the potential that a contribution to such a
federal candidate would be covered under rule 206(4)-5 simply did not
occur to him in that frame of mind. The Contributor never told any
prospective or existing investor (including the Clients) about the
Contribution, and did not discuss the Contribution with BlackRock, the
Advisers or any of their covered associates.
6. The initial selection process pursuant to which each Client
decided to invest in a fund advised by an Adviser or to select a RIC
advised by an Adviser as an investment option in a participant-directed
plan, as applicable, had been completed before the contribution was
made. Applicants state that the Contributor had no intention to seek,
and no action was taken by the Contributor or the Applicants, to obtain
any direct or indirect influence from the Official or any other person
with respect to those investments. The Contributor did not participate
in any capacity in soliciting those investments or any other investment
advisory business covered under rule 206(4)-5 from any government
entity.
7. The Contribution was discovered on October 6, 2016 by
Blackrock's Compliance department in the course of internal compliance
testing. Specifically, Blackrock discovered the Contribution after a
routine search on the Federal Election Commission's website. The
Contributor requested a refund of the full $2,700 on November 11, 2016
and received a refund on November 23, 2016. Applicants represent that
all compensation earned that is attributable to the Clients'
investments since the Contribution Date has been placed in escrow
pending the outcome of this Application.
8. BlackRock's political contribution policies and procedures (the
``Policy'') which apply to BlackRock as well as its subsidiaries,
including the Advisers, were adopted and implemented in order to
coincide with the effective date of rule 206(4)-5, well before the
Contribution was made. The Applicants submit that at the time of the
Contribution, the Policy required, and continues to require, that all
employees pre-clear all political contributions made in the United
States. There is no de minimis exception from the pre-clearance
requirement. Under the existing Policy, BlackRock requires employees to
certify annually to their compliance with the Policy, sends reminders
about the Policy and its pre-clearance requirement twice every year,
and requires all employees to complete an annual computer-based
training module that addresses the Policy and its pre-clearance
requirement. In addition, BlackRock periodically conducts searches of
public websites for contributions made by employees.
Applicants' Legal Analysis
1. Rule 206(4)-5(a)(1) under the 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 a 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 Official is an ``official'' as defined
in rule 206(4)-5(f)(6).
2. Section 206A of the Act authorizes the Commission to
``conditionally or unconditionally exempt any person or transaction . .
. from any provision or provisions of [the 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 Act].''
3. Rule 206(4)-5(e) provides that the Commission may conditionally
or unconditionally grant an exemption to 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 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. Applicants request an order pursuant to section 206A and rule
206(4)-5(e), exempting them 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. Applicants submit 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 Act. Applicants further submit that the other factors
set forth in rule 206(4)-5(e) similarly weigh in favor of granting an
exemption to the Applicants to avoid consequences disproportionate to
the violation.
6. Applicants contend that given the nature of the Contribution,
and the lack of any evidence that the Advisers 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
Clients' interests are best served by allowing the Advisers and their
Clients to continue their relationship uninterrupted. Applicants state
that causing the Advisers to forgo the impacted compensation
attributable to the two-year period would result in a financial loss of
approximately $37 million or 13,700 times the amount of the
Contribution. Applicants suggest that the policy underlying rule
206(4)-5 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. Applicants represent that the Policy was adopted and published
well before the Contribution was made. Applicants further represent
that, the Policy has conformed to the requirements of rule
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206(4)-5 and has been more rigorous than rule 206(4)-5's requirements
as BlackRock has monitored compliance with the Policy by searching for
an individual employee's past political contributions on the Federal
Election Commission's database whenever an individual makes a request
to BlackRock to pre-clear a contribution to a federal candidate.
Applicants submit that BlackRock is in the process of enhancing this
monitoring protocol.
8. Applicants assert that at no time did any employee or covered
associate of BlackRock, the Advisers or any of their affiliates, other
than the Contributor have any knowledge that the Contribution had been
made before its discovery by the Compliance department in October 2016.
9. Applicants assert that after learning of the Contribution and
confirming the Contributor's covered status, BlackRock caused the
Contributor to promptly obtain a full refund of the Contribution.
Applicants submit that in response to the contribution, BlackRock has
begun the process of implementing enhancements to the Policy that will
include (a) sending its employees, including employees of its
affiliates a third annual reminder to pre-clear all political
contributions in the United States, including those to federal
candidates (b) revising its annual computer-based training module to
highlight the need to pre-clear all political contributions in the
United States, including those to federal candidates, and (c) enhancing
its protocol to monitor compliance with the Policy's pre-clearance
requirements by searching the FEC's and certain states' campaign
finance databases for contributions made by a sampling of covered
associates on a quarterly basis. Finally, BlackRock's Compliance
department will remind the Contributor of the Policy's pre-clearance
requirement on at least a quarterly basis.
10. Applicants state that the Contributor is and has, at all
relevant times, been a covered associate of the Advisers. Applicants
note that the Contributor has never solicited investment advisory
business covered under rule 206(4)-5 from government entities and has
had no direct contact or involvement with any of the Clients or the
members of their Boards regarding any business matters.
11. Applicants assert that the Clients' initial investments with
the Advisers substantially predate the Contribution. They were done on
an arm's length basis and the Contributor and the Applicants took no
action to obtain any direct or indirect influence from the Official.
12. Applicants submit that neither the Advisers 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. Applicants further submit that there was no violation of
the Advisers' fiduciary duty to deal fairly or disclose material
conflicts given the absence of any intent or action by the Advisers or
the Contributor to influence the selection process. Applicants contend
that in the case of the Contribution, the imposition of the two-year
prohibition on compensation does not achieve rule 206(4)-5's purposes
and would result in consequences disproportionate to the mistake that
was made.
For the Commission, by the Division of Investment Management,
under delegated authority.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-10499 Filed 5-16-18; 8:45 am]
BILLING CODE 8011-01-P
