Charles Schwab & Co. Inc. and Charles Schwab Investment Management, Inc., 32926-32929 [2018-15078]

Download as PDF 32926 Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES Agreement’’).1 An Adviser will provide each Subadvised Series with continuous investment management services, subject to the supervision of, and policies established by, the board of trustees of each Trust (each, a ‘‘Board’’). Each Investment Management Agreement permits the Adviser, subject to the approval of the applicable Board, to delegate to one or more sub-advisers (each, a ‘‘Sub-Adviser’’ and collectively, the ‘‘Sub-Advisers’’) the responsibility to provide the day-to-day portfolio investment management of each Subadvised Series, subject to the supervision and direction of the Adviser.2 The primary responsibility for managing each Subadvised Series will remain vested in the Adviser. The Adviser will hire, evaluate, allocate assets to and oversee the Sub-Advisers, including determining whether a SubAdviser should be terminated, at all times subject to the authority of the applicable Board. 2. Applicants request an exemption to permit the Adviser, subject to Board approval, to hire certain Sub-Advisers pursuant to Sub-Advisory Agreements and materially amend existing SubAdvisory Agreements without obtaining the shareholder approval required under section 15(a) of the Act and rule 18f–2 under the Act.3 Applicants also seek an exemption from the Disclosure Requirements to permit a Subadvised 1 Applicants request relief with respect to the named Applicants, as well as to any future series of the Trusts and any other registered open-end management investment company or series thereof that: (a) Is advised by the Initial Adviser, its successors, or any entity controlling, controlled by or under common control with the Initial Adviser or its successors (each, an ‘‘Adviser’’); (b) uses the multi-manager structure described in the application; and (c) complies with the terms and conditions set forth in the application (each, a ‘‘Subadvised Series’’). For purposes of the requested order, ‘‘successor’’ is limited to an entity that results from a reorganization into another jurisdiction or a change in the type of business organization. 2 A ‘‘Sub-Adviser’’ for a Subadvised Series is (1) an indirect or direct ‘‘wholly-owned subsidiary’’ (as such term is defined in the Act) of the Adviser for that Subadvised Series, or (2) a sister company of the Adviser for that Subadvised Series that is an indirect or direct ‘‘wholly-owned subsidiary’’ of the same company that, indirectly or directly, wholly owns the Adviser (each of (1) and (2) a ‘‘WhollyOwned Sub-Adviser’’ and collectively, the ‘‘Wholly-Owned Sub-Advisers’’), or (3) not an ‘‘affiliated person’’ (as such term is defined in section 2(a)(3) of the Act) of the Subadvised Series or the Adviser, except to the extent that an affiliation arises solely because the Sub-Adviser serves as a sub-adviser to a Subadvised Series (‘‘Non-Affiliated Sub-Advisers’’). 3 The requested relief will not extend to any subadviser, other than a Wholly-Owned Sub-Adviser, who is an affiliated person, as defined in Section 2(a)(3) of the Act, of the Subadvised Series, any Trust or of the Adviser, other than by reason of serving as a sub-adviser to one or more of the Subadvised Series (‘‘Affiliated Sub-Adviser’’). VerDate Sep<11>2014 17:31 Jul 13, 2018 Jkt 244001 Series to disclose (as both a dollar amount and a percentage of the Subadvised Series’ net assets): (a) The aggregate fees paid to the Adviser and any Wholly-Owned Sub-Adviser; (b) the aggregate fees paid to Non-Affiliated Sub-Advisers; and (c) the fee paid to each Affiliated Sub-Adviser (collectively, ‘‘Aggregate Fee Disclosure’’). 3. Applicants agree that any order granting the requested relief will be subject to the terms and conditions stated in the application. Such terms and conditions provide for, among other safeguards, appropriate disclosure to Subadvised Series shareholders and notification about sub-advisory changes and enhanced Board oversight to protect the interests of the Subadvised Series’ shareholders. 4. Section 6(c) of the Act provides that the Commission may exempt any person, security, or transaction or any class or classes of persons, securities, or transactions from any provisions of the Act, or any rule thereunder, if such relief is necessary or appropriate in the public interest and consistent with the protection of investors and purposes fairly intended by the policy and provisions of the Act. Applicants believe that the requested relief meets this standard because, as further explained in the application, the Investment Management Agreements will remain subject to shareholder approval while the role of the SubAdvisers is substantially similar to that of individual portfolio managers, so that requiring shareholder approval of SubAdvisory Agreements would impose unnecessary delays and expenses on the Subadvised Series. Applicants believe that the requested relief from the Disclosure Requirements meets this standard because it will improve the Adviser’s ability to negotiate fees paid to the Sub-Advisers that are more advantageous for the Subadvised Series. For the Commission, by the Division of Investment Management, under delegated authority. Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–15068 Filed 7–13–18; 8:45 am] BILLING CODE 8011–01–P PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 SECURITIES AND EXCHANGE COMMISSION [Investment Company Act Release No. 33157; File No. 812–14926] Charles Schwab & Co. Inc. and Charles Schwab Investment Management, Inc. July 10, 2018. Securities and Exchange Commission (‘‘Commission’’). ACTION: Temporary order and notice of application for a permanent order under section 9(c) of the Investment Company Act of 1940 (‘‘Act’’). AGENCY: Applicants have received a temporary order (‘‘Temporary Order’’) exempting them from section 9(a) of the Act, with respect to an injunction entered against Charles Schwab & Co. Inc. (‘‘CS&Co.’’) on July 9, 2018 by the U.S. District Court for the Northern District of California (‘‘District Court’’), in connection with a consent order between CS&Co. and the Commission, until the Commission takes final action on an application for a permanent order (the ‘‘Permanent Order,’’ and with the Temporary Order, the ‘‘Orders’’). Applicants also have applied for a Permanent Order. APPLICANTS: CS&Co. and Charles Schwab Investment Management, Inc. (‘‘CSIM’’) (each an ‘‘Applicant’’ and together, the ‘‘Applicants’’). FILING DATE: The application was filed on July 2, 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 August 6, 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 who wish to be notified of a hearing may request notification by writing to the Commission’s Secretary. ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090; Applicants: Charles Schwab & Co. Inc.: 211 Main Street, San Francisco, CA 94105; Charles Schwab Investment SUMMARY OF APPLICATION: E:\FR\FM\16JYN1.SGM 16JYN1 Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices Management, Inc.: 211 Main Street, San Francisco, CA 94105. FOR FURTHER INFORMATION CONTACT: Thankam A. Varghese, AttorneyAdviser, Kyle R. Ahlgren, Senior Counsel, or Holly L. Hunter-Ceci, Assistant Chief Counsel, at (202) 551– 6821 (Division of Investment Management, Chief Counsel’s Office). SUPPLEMENTARY INFORMATION: The following is a temporary order and a summary of the application. The complete application may be obtained via the Commission’s website by searching for the file number, or an applicant using the Company name box, at https://www.sec.gov/search/ search.htm, or by calling (202) 551– 8090. sradovich on DSK3GMQ082PROD with NOTICES Applicants’ Representations 1. CS&Co. is a California corporation registered as a broker-dealer under the Securities Exchange Act of 1934, as amended (‘‘Exchange Act’’), and as an investment adviser under the Investment Advisers Act of 1940, as amended (the ‘‘Advisers Act’’). CS&Co. serves as the principal underwriter for 85 open-end management investment companies registered under the Act (‘‘Open-End Funds’’). CSIM is a Delaware corporation registered as an investment adviser under the Advisers Act that serves as investment adviser to 107 Open-End Funds. A list of the funds to which CS&Co. and CSIM served as investment adviser or principal underwriter, individual adviser or subadviser as of June 1, 2018 (the ‘‘Funds’’) is appended to the Application. 2. CS&Co. and CSIM are whollyowned subsidiaries of The Charles Schwab Corporation (‘‘CS’’), a Delaware corporation headquartered in San Francisco, California and listed on the New York Stock Exchange. CS is a savings and loan holding company incorporated in 1986 that engages through its subsidiaries in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. 3. While no existing company of which CS&Co. is an ‘‘affiliated person’’ within the meaning of section 2(a)(3) of the Act (‘‘Affiliated Person’’), other than CS&Co. and CSIM (the ‘‘Fund Servicing Applicants’’) currently serves as an investment adviser (as defined in section 2(a)(20) of the Act) to, or depositor of, any registered investment company under the Act, employees’ securities company or investment company that has elected to be treated as a business development company under the Act, or as a principal underwriter (as defined in section VerDate Sep<11>2014 17:31 Jul 13, 2018 Jkt 244001 2(a)(29) of the Act) for any Open-End Fund, unit investment trust registered under the Act (‘‘UIT’’), or face-amount certificate company registered under the Act (‘‘FACC’’) (such activities, the ‘‘Fund Servicing Activities’’), Applicants request that any relief granted by the Commission pursuant to the application also apply to any existing company of which CS&Co. is an Affiliated Person and to any other company of which CS&Co. may become an Affiliated Person in the future (together with the Fund Servicing Applicants, the ‘‘Covered Persons’’) with respect to any activity contemplated by section 9(a) of the Act.1 4. On July 2, 2018, the Commission filed a complaint in the District Court (the ‘‘Complaint’’) alleging violations of section 17(a) of the Exchange Act and rule 17a–8 thereunder. CS&Co. agreed to consent to the entry of a judgment by the District Court against CS&Co. (the ‘‘Final Judgment’’). The Complaint alleges that, in violation of section 17(a) of the Exchange Act and rule 17a–8 thereunder, CS&Co. failed to file Suspicious Activity Reports (‘‘SARs’’) on suspicious transactions by independent advisers that CS&Co. terminated from its custodial platform (‘‘Advisers’’). Such Advisers were not affiliated or associated with CS&Co. CS&Co. terminated the Advisers for engaging in activity CS&Co. determined violated its internal policies and presented risk to CS&Co. or its customers. The Complaint alleges that: (1) CS&Co.’s failure to file SARs during the 2012–2013 time period resulted from its inconsistent implementation of policies and procedures for identifying reportable transactions under the SAR rule (31 CFR 1023.320(a)) when CS&Co. investigated and terminated Advisers from its custodial platform; (2) although CS&Co. took steps to investigate and terminate Advisers, CS&Co. did not have clear or consistent policies for the types of activities for which SARs need to be filed; and (3) in a number of cases in which Advisers were terminated and there was reason for CS&Co. to suspect fraudulent activity, CS&Co. applied an unreasonably high standard for determining whether to file a SAR on the suspicious transactions. 5. Concurrently with the filing of the Complaint, CS&Co. presented to the District Court an executed Consent of the Defendant Charles Schwab & Co. Inc. to Entry of Final Judgment (the 1 The Fund Servicing Applicants and other Covered Persons may, if the Orders are granted, in the future act in any of the capacities contemplated by section 9(a) of the Act subject to the applicable terms and conditions of the Orders. PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 32927 ‘‘Consent’’), consenting to the Final Judgment. The Final Judgment permanently restrains and enjoins CS&Co from violating section 17(a) of the Exchange Act and rule 17a–8 thereunder (the ‘‘Injunction’’) and ordered CS&Co. to pay a civil penalty in the amount of $2,800,000. Applicants’ Legal Analysis 1. Section 9(a)(2) of the Act provides, in pertinent part, that a person may not serve or act as, among other things, an investment adviser or depositor of any registered investment company or as principal underwriter for any registered open-end investment company, UIT, or FACC, if such person ‘‘. . . by reason of any misconduct, is permanently or temporarily enjoined by order, judgment, or decree of any court of competent jurisdiction from acting as an underwriter, broker, dealer, investment adviser, municipal securities dealer, bank, transfer agent, credit rating agency or entity or person required to be registered under the Commodity Exchange Act, or as an affiliated person, salesman, or employee of any investment company, bank, insurance company, or entity or person required to be registered under the Commodity Exchange Act, or from engaging in or continuing any conduct or practice in connection with any such activity or in connection with the purchase or sale of any security.’’ Section 9(a)(3) of the Act makes the prohibitions of section 9(a)(2) applicable to a company, any affiliated person of which has been disqualified under the provisions of section 9(a)(2). Section 2(a)(3) of the Act defines ‘‘affiliated person’’ to include, among others, any person directly or indirectly controlling, controlled by, or under common control with, the other person. The Injunction would result in a disqualification of CS&Co. from acting in the capacities specified in section 9(a)(2) because CS&Co. would be permanently enjoined by the District Court from engaging in or continuing certain conduct and/or practices in connection with the offer or sale of any security. The Injunction would also result in the disqualification of CSIM under section 9(a)(3) because CS&Co. is an Affiliated Person of CSIM within the meaning of section 2(a)(3) of the Act and would be subject to an injunction described in section 9(a)(2). Other Covered Persons similarly would be disqualified pursuant to section 9(a)(3) were they to act in any of the capacities listed in section 9(a). 2. Section 9(c) of the Act provides that, upon application, the Commission shall by order grant an exemption from the disqualification provisions of E:\FR\FM\16JYN1.SGM 16JYN1 sradovich on DSK3GMQ082PROD with NOTICES 32928 Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices section 9(a) of the Act, either unconditionally or on an appropriate temporary or other conditional basis, to any person if that person establishes that: (1) The prohibitions of section 9(a), as applied to the person, are unduly or disproportionately severe; or (2) the conduct of the person has been such as not to make it against the public interest or the protection of investors to grant the exemption. Applicants have filed an application pursuant to section 9(c) seeking a Temporary Order and a Permanent Order exempting the Fund Servicing Applicants and other Covered Persons from the disqualification provisions of section 9(a) of the Act. Applicants and other Covered Persons may, if the relief is granted, in the future act in any of the capacities contemplated by section 9(a) of the Act subject to the applicable terms and conditions of the Orders. 3. Applicants believe they meet the standards for exemption specified in section 9(c). Applicants assert that: (i) The scope of the misconduct was limited and did not involve any of the Fund Servicing Applicants performing Fund Service Activities, or any Fund with respect to which the Fund Servicing Applicants engaged in Fund Servicing Activities or their respective assets; (ii) application of the statutory bar would result in material economic losses, and the operations of the Funds would be disrupted as they sought to engage new underwriters, advisers and/ or sub-advisers, as the case may be; (iii) the prohibitions of section 9(a), if applied to the Fund Servicing Applicants and other Covered Persons, would be unduly or disproportionately severe; and (iv) the Conduct did not constitute conduct that would make it against the public interest or protection of investors to grant the exemption from section 9(a). 4. Applicants assert that the Conduct did not implicate any Fund Servicing Activities and did not involve any Fund or the assets of any Fund with respect to which any Applicants provide Fund Servicing Activities. Applicants further note that none of the CS&Co. employees who were directly responsible for determining whether a SAR filing was required for the Advisers had any involvement in Fund Servicing Activities, and that no such person remains in the employ of any of the Fund Servicing Applicants. 5. Applicants assert that neither the protection of investors nor the public interest would be served by permitting the section 9(a) disqualifications to apply to the Fund Servicing Applicants because those disqualifications would deprive the Funds of the advisory or VerDate Sep<11>2014 17:31 Jul 13, 2018 Jkt 244001 sub-advisory and underwriting services that shareholders expected the Funds would receive when they decided to invest in the Funds. Applicants also assert that the prohibitions of section 9(a) could operate to the financial detriment of the Funds and their shareholders, which would be an unduly and disproportionately severe consequence given that the Conduct did not implicate any of the Fund Servicing Activities. Applicants further assert that the inability of the Fund Servicing Applicants to continue providing investment advisory and underwriting services to Funds would result in the Funds and their shareholders facing other potential hardships, as described in the application. 6. Applicants assert that if the Fund Servicing Applicants were barred under section 9(a) from providing investment advisory and underwriting services to the Funds and were unable to obtain the requested exemption, the effect on their businesses and employees would be severe. Applicants represent that CS&Co. has committed capital and other resources to establish expertise in underwriting the securities of Open-End Funds and to establish distribution arrangements for Open-End Fund shares. Applicants further represent that without relief under section 9(c), CS&Co. would lose the greater part of its business, potentially leading to sales force layoffs and placing CS&Co. at a competitive disadvantage to other distributors who can offer intermediaries a full menu of products. Applicants further represent CSIM has committed substantial capital and other resources to establishing expertise in advising Funds, and that investment advisory services provided to Funds represents more than 94.9% of its assets under management (as of March 31, 2018). 7. Applicants represent that: (1) None of the current or former directors, officers or employees involved in Fund Servicing Activities of the Fund Servicing Applicants had any involvement in the Conduct; (2) none of the CS&Co. employees who were directly responsible for determining whether a SAR filing was required for the Advisers had any involvement in Fund Servicing Activities, and that no such person remains in the employ of any of the Fund Servicing Applicants; and (3) because the Conduct did not involve Fund Servicing Activities, shareholders of Funds were not affected any differently than if those Funds had received services from any other nonaffiliated investment adviser or principal underwriter. PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 8. Applicants represent that CS&Co. has taken substantial remedial actions to address the conduct at issue in the Complaint and Final Judgment. As further detailed in the Application, such remedial actions include improving CS&Co.’s regulatory compliance program with an emphasis on SAR compliance, increasing the number of employees dedicated to anti-money laundering and fraud prevention (including employees with law enforcement backgrounds), and increasing the quantity and quality of internal AML and SAR training. 9. As a result of the foregoing, Applicants submit that granting the exemption as requested in the application is consistent with the public interest and the protection of investors. 10. To provide further assurance that the exemptive relief being requested herein would be consistent with the public interest and the protection of the investors, Applicants agree that they will, as soon as reasonably practical following the entry of the Injunction, distribute to the boards of trustees of the Funds (‘‘Boards’’) written materials describing the circumstances that led to the Injunction, as well as any impact on the Funds and the application. The written materials will include an offer to discuss the materials at an in-person meeting with the Boards, including the trustees who are not ‘‘interested persons’’ of the Funds as defined in section 2(a)(19) of the Act and their ‘‘independent legal counsel’’ as defined in rule 0–1(a)(6) under the Act. Applicants undertake to provide the Boards with all information concerning the Injunction and the application as necessary for those Funds to fulfill their disclosure and other obligations under the U.S. federal securities laws and will provide them a copy of the Final Judgment as entered by the District Court. 11. Applicants state that none of the Applicants nor any of their affiliates have previously applied for orders under section 9(c) of the Act. Applicants’ Conditions Applicants agree that any order granted by the Commission pursuant to the application will be subject to the following conditions: 1. Any temporary exemption granted pursuant to the Application shall be without prejudice to, and shall not limit the Commission’s rights in any manner with respect to, any Commission investigation of, or administrative proceedings involving or against, Covered Persons, including, without limitation, the consideration by the Commission of a permanent exemption E:\FR\FM\16JYN1.SGM 16JYN1 Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices from section 9(a) of the Act requested pursuant to the Application or the revocation or removal of any temporary exemptions granted under the Act in connection with the application. 2. Each Applicant and Covered Person will adopt and implement policies and procedures reasonably designed to ensure that it will comply with the terms and conditions of the Orders within 60 days of the date of the Permanent Order. 3. CS&Co. will comply with the terms and conditions of the Consent. 4. The Applicants will provide written notification to the Chief Counsel of the Commission’s Division of Investment Management with a copy to the Chief Counsel of the Commission’s Division of Enforcement of a material violation of the terms and conditions of the Orders and Consent within 30 days of discovery of the material violation. Temporary Order The Commission has considered the matter and finds that Applicants have made the necessary showing to justify granting a temporary exemption. Accordingly, It is hereby ordered, pursuant to section 9(c) of the Act, that the Applicants and any other Covered Persons are granted a temporary exemption from the provisions of section 9(a), effective as of the date of the Injunction, solely with respect to the Injunction, subject to the representations and conditions in the application, until the Commission takes final action on their application for a permanent order. 32929 By the Commission. Eduardo A. Aleman, Assistant Secretary. www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. [FR Doc. 2018–15078 Filed 7–13–18; 8:45 am] II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–83616; File No. SR– NYSEARCA–2018–51] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify the NYSE Arca Options Fee Schedule July 10, 2018. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on July 2, 2018, NYSE Arca, Inc. (the ‘‘Exchange’’ or ‘‘NYSE Arca’’) 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 self-regulatory organization. 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 modify the NYSE Arca Options Fee Schedule (‘‘Fee Schedule’’). The Exchange proposes to implement the fee change effective July 2, 2018. The proposed rule change is available on the Exchange’s website at In its filing with the Commission, the self-regulatory organization 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 those 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 parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of this filing is to modify the Fee Schedule, effective July 2, 2018, to provide an incentive for Floor Brokers to bring business to the Trading Floor in the newly listed options on the NYSE FANG+ Index (‘‘NYSE FANG+’’), which trades under the symbol FAANG. The Exchange proposes to introduce rebates for Floor Broker organizations that execute a certain number of FAANG contract sides on the Exchange in a calendar month, based on the highest Tier achieved (the ‘‘Rebate’’). The volume Tiers, and the associated proposed Rebate, are set forth as follows: FAANG REBATE Tier sradovich on DSK3GMQ082PROD with NOTICES 1 2 3 4 Floor broker FAANG executions ........................ ........................ ........................ ........................ From 200 to 999 contract sides ........................................................................................................................... From 1,000 to 1,999 contract sides ..................................................................................................................... 2,000 to 19,999 contract sides ............................................................................................................................. 20,000 or more contract sides .............................................................................................................................. The Exchange believes the proposed Rebate would further the Exchange’s goal of introducing new products to the marketplace by encouraging trading in this index, in particular by encouraging Floor Brokers to bring business to the Trading Floor, which would in turn, benefit all market participants through increased liquidity and more opportunities to trade. 1 15 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act, in general, and furthers the objectives of Sections 6(b)(4) and (5) of the Act, in particular, because it provides for the equitable allocation of reasonable dues, fees, and other charges among its members, issuers and other persons using its facilities and does not unfairly U.S.C. 78s(b)(1). VerDate Sep<11>2014 Rebate 17:31 Jul 13, 2018 2 15 Jkt 244001 PO 00000 U.S.C. 78a. Frm 00098 Fmt 4703 discriminate between customers, issuers, brokers or dealers. The Exchange believes the proposal to introduce a Floor Broker Rebate for executing a certain number of options contract sides on NYSE FANG+ is reasonable, equitable and not unfairly discriminatory for the following reasons. The Exchange believes the proposed rebates, which apply equally to all Floor Broker transactions in NYSE FANG+, regardless of account type, to 3 17 Sfmt 4703 ($1,000) (2,500) (5,000) (10,000) E:\FR\FM\16JYN1.SGM CFR 240.19b–4. 16JYN1

Agencies

[Federal Register Volume 83, Number 136 (Monday, July 16, 2018)]
[Notices]
[Pages 32926-32929]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-15078]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 33157; File No. 812-14926]


Charles Schwab & Co. Inc. and Charles Schwab Investment 
Management, Inc.

July 10, 2018.
AGENCY:  Securities and Exchange Commission (``Commission'').

ACTION:  Temporary order and notice of application for a permanent 
order under section 9(c) of the Investment Company Act of 1940 
(``Act'').

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SUMMARY OF APPLICATION:  Applicants have received a temporary order 
(``Temporary Order'') exempting them from section 9(a) of the Act, with 
respect to an injunction entered against Charles Schwab & Co. Inc. 
(``CS&Co.'') on July 9, 2018 by the U.S. District Court for the 
Northern District of California (``District Court''), in connection 
with a consent order between CS&Co. and the Commission, until the 
Commission takes final action on an application for a permanent order 
(the ``Permanent Order,'' and with the Temporary Order, the 
``Orders''). Applicants also have applied for a Permanent Order.

Applicants:  CS&Co. and Charles Schwab Investment Management, Inc. 
(``CSIM'') (each an ``Applicant'' and together, the ``Applicants'').

Filing Date:  The application was filed on July 2, 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 August 6, 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 who wish to be notified of a hearing 
may request notification by writing to the Commission's Secretary.

ADDRESSES:  Secretary, U.S. Securities and Exchange Commission, 100 F 
Street NE, Washington, DC 20549-1090; Applicants: Charles Schwab & Co. 
Inc.: 211 Main Street, San Francisco, CA 94105; Charles Schwab 
Investment

[[Page 32927]]

Management, Inc.: 211 Main Street, San Francisco, CA 94105.

FOR FURTHER INFORMATION CONTACT: Thankam A. Varghese, Attorney-Adviser, 
Kyle R. Ahlgren, Senior Counsel, or Holly L. Hunter-Ceci, Assistant 
Chief Counsel, at (202) 551-6821 (Division of Investment Management, 
Chief Counsel's Office).

SUPPLEMENTARY INFORMATION:  The following is a temporary order and a 
summary of the application. The complete application may be obtained 
via the Commission's website by searching for the file number, or an 
applicant using the Company name box, at https://www.sec.gov/search/search.htm, or by calling (202) 551-8090.

Applicants' Representations

    1. CS&Co. is a California corporation registered as a broker-dealer 
under the Securities Exchange Act of 1934, as amended (``Exchange 
Act''), and as an investment adviser under the Investment Advisers Act 
of 1940, as amended (the ``Advisers Act''). CS&Co. serves as the 
principal underwriter for 85 open-end management investment companies 
registered under the Act (``Open-End Funds''). CSIM is a Delaware 
corporation registered as an investment adviser under the Advisers Act 
that serves as investment adviser to 107 Open-End Funds. A list of the 
funds to which CS&Co. and CSIM served as investment adviser or 
principal underwriter, individual adviser or sub-adviser as of June 1, 
2018 (the ``Funds'') is appended to the Application.
    2. CS&Co. and CSIM are wholly-owned subsidiaries of The Charles 
Schwab Corporation (``CS''), a Delaware corporation headquartered in 
San Francisco, California and listed on the New York Stock Exchange. CS 
is a savings and loan holding company incorporated in 1986 that engages 
through its subsidiaries in wealth management, securities brokerage, 
banking, asset management, custody, and financial advisory services.
    3. While no existing company of which CS&Co. is an ``affiliated 
person'' within the meaning of section 2(a)(3) of the Act (``Affiliated 
Person''), other than CS&Co. and CSIM (the ``Fund Servicing 
Applicants'') currently serves as an investment adviser (as defined in 
section 2(a)(20) of the Act) to, or depositor of, any registered 
investment company under the Act, employees' securities company or 
investment company that has elected to be treated as a business 
development company under the Act, or as a principal underwriter (as 
defined in section 2(a)(29) of the Act) for any Open-End Fund, unit 
investment trust registered under the Act (``UIT''), or face-amount 
certificate company registered under the Act (``FACC'') (such 
activities, the ``Fund Servicing Activities''), Applicants request that 
any relief granted by the Commission pursuant to the application also 
apply to any existing company of which CS&Co. is an Affiliated Person 
and to any other company of which CS&Co. may become an Affiliated 
Person in the future (together with the Fund Servicing Applicants, the 
``Covered Persons'') with respect to any activity contemplated by 
section 9(a) of the Act.\1\
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    \1\ The Fund Servicing Applicants and other Covered Persons may, 
if the Orders are granted, in the future act in any of the 
capacities contemplated by section 9(a) of the Act subject to the 
applicable terms and conditions of the Orders.
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    4. On July 2, 2018, the Commission filed a complaint in the 
District Court (the ``Complaint'') alleging violations of section 17(a) 
of the Exchange Act and rule 17a-8 thereunder. CS&Co. agreed to consent 
to the entry of a judgment by the District Court against CS&Co. (the 
``Final Judgment''). The Complaint alleges that, in violation of 
section 17(a) of the Exchange Act and rule 17a-8 thereunder, CS&Co. 
failed to file Suspicious Activity Reports (``SARs'') on suspicious 
transactions by independent advisers that CS&Co. terminated from its 
custodial platform (``Advisers''). Such Advisers were not affiliated or 
associated with CS&Co. CS&Co. terminated the Advisers for engaging in 
activity CS&Co. determined violated its internal policies and presented 
risk to CS&Co. or its customers. The Complaint alleges that: (1) 
CS&Co.'s failure to file SARs during the 2012-2013 time period resulted 
from its inconsistent implementation of policies and procedures for 
identifying reportable transactions under the SAR rule (31 CFR 
1023.320(a)) when CS&Co. investigated and terminated Advisers from its 
custodial platform; (2) although CS&Co. took steps to investigate and 
terminate Advisers, CS&Co. did not have clear or consistent policies 
for the types of activities for which SARs need to be filed; and (3) in 
a number of cases in which Advisers were terminated and there was 
reason for CS&Co. to suspect fraudulent activity, CS&Co. applied an 
unreasonably high standard for determining whether to file a SAR on the 
suspicious transactions.
    5. Concurrently with the filing of the Complaint, CS&Co. presented 
to the District Court an executed Consent of the Defendant Charles 
Schwab & Co. Inc. to Entry of Final Judgment (the ``Consent''), 
consenting to the Final Judgment. The Final Judgment permanently 
restrains and enjoins CS&Co from violating section 17(a) of the 
Exchange Act and rule 17a-8 thereunder (the ``Injunction'') and ordered 
CS&Co. to pay a civil penalty in the amount of $2,800,000.

Applicants' Legal Analysis

    1. Section 9(a)(2) of the Act provides, in pertinent part, that a 
person may not serve or act as, among other things, an investment 
adviser or depositor of any registered investment company or as 
principal underwriter for any registered open-end investment company, 
UIT, or FACC, if such person ``. . . by reason of any misconduct, is 
permanently or temporarily enjoined by order, judgment, or decree of 
any court of competent jurisdiction from acting as an underwriter, 
broker, dealer, investment adviser, municipal securities dealer, bank, 
transfer agent, credit rating agency or entity or person required to be 
registered under the Commodity Exchange Act, or as an affiliated 
person, salesman, or employee of any investment company, bank, 
insurance company, or entity or person required to be registered under 
the Commodity Exchange Act, or from engaging in or continuing any 
conduct or practice in connection with any such activity or in 
connection with the purchase or sale of any security.'' Section 9(a)(3) 
of the Act makes the prohibitions of section 9(a)(2) applicable to a 
company, any affiliated person of which has been disqualified under the 
provisions of section 9(a)(2). Section 2(a)(3) of the Act defines 
``affiliated person'' to include, among others, any person directly or 
indirectly controlling, controlled by, or under common control with, 
the other person. The Injunction would result in a disqualification of 
CS&Co. from acting in the capacities specified in section 9(a)(2) 
because CS&Co. would be permanently enjoined by the District Court from 
engaging in or continuing certain conduct and/or practices in 
connection with the offer or sale of any security. The Injunction would 
also result in the disqualification of CSIM under section 9(a)(3) 
because CS&Co. is an Affiliated Person of CSIM within the meaning of 
section 2(a)(3) of the Act and would be subject to an injunction 
described in section 9(a)(2). Other Covered Persons similarly would be 
disqualified pursuant to section 9(a)(3) were they to act in any of the 
capacities listed in section 9(a).
    2. Section 9(c) of the Act provides that, upon application, the 
Commission shall by order grant an exemption from the disqualification 
provisions of

[[Page 32928]]

section 9(a) of the Act, either unconditionally or on an appropriate 
temporary or other conditional basis, to any person if that person 
establishes that: (1) The prohibitions of section 9(a), as applied to 
the person, are unduly or disproportionately severe; or (2) the conduct 
of the person has been such as not to make it against the public 
interest or the protection of investors to grant the exemption. 
Applicants have filed an application pursuant to section 9(c) seeking a 
Temporary Order and a Permanent Order exempting the Fund Servicing 
Applicants and other Covered Persons from the disqualification 
provisions of section 9(a) of the Act. Applicants and other Covered 
Persons may, if the relief is granted, in the future act in any of the 
capacities contemplated by section 9(a) of the Act subject to the 
applicable terms and conditions of the Orders.
    3. Applicants believe they meet the standards for exemption 
specified in section 9(c). Applicants assert that: (i) The scope of the 
misconduct was limited and did not involve any of the Fund Servicing 
Applicants performing Fund Service Activities, or any Fund with respect 
to which the Fund Servicing Applicants engaged in Fund Servicing 
Activities or their respective assets; (ii) application of the 
statutory bar would result in material economic losses, and the 
operations of the Funds would be disrupted as they sought to engage new 
underwriters, advisers and/or sub-advisers, as the case may be; (iii) 
the prohibitions of section 9(a), if applied to the Fund Servicing 
Applicants and other Covered Persons, would be unduly or 
disproportionately severe; and (iv) the Conduct did not constitute 
conduct that would make it against the public interest or protection of 
investors to grant the exemption from section 9(a).
    4. Applicants assert that the Conduct did not implicate any Fund 
Servicing Activities and did not involve any Fund or the assets of any 
Fund with respect to which any Applicants provide Fund Servicing 
Activities. Applicants further note that none of the CS&Co. employees 
who were directly responsible for determining whether a SAR filing was 
required for the Advisers had any involvement in Fund Servicing 
Activities, and that no such person remains in the employ of any of the 
Fund Servicing Applicants.
    5. Applicants assert that neither the protection of investors nor 
the public interest would be served by permitting the section 9(a) 
disqualifications to apply to the Fund Servicing Applicants because 
those disqualifications would deprive the Funds of the advisory or sub-
advisory and underwriting services that shareholders expected the Funds 
would receive when they decided to invest in the Funds. Applicants also 
assert that the prohibitions of section 9(a) could operate to the 
financial detriment of the Funds and their shareholders, which would be 
an unduly and disproportionately severe consequence given that the 
Conduct did not implicate any of the Fund Servicing Activities. 
Applicants further assert that the inability of the Fund Servicing 
Applicants to continue providing investment advisory and underwriting 
services to Funds would result in the Funds and their shareholders 
facing other potential hardships, as described in the application.
    6. Applicants assert that if the Fund Servicing Applicants were 
barred under section 9(a) from providing investment advisory and 
underwriting services to the Funds and were unable to obtain the 
requested exemption, the effect on their businesses and employees would 
be severe. Applicants represent that CS&Co. has committed capital and 
other resources to establish expertise in underwriting the securities 
of Open-End Funds and to establish distribution arrangements for Open-
End Fund shares. Applicants further represent that without relief under 
section 9(c), CS&Co. would lose the greater part of its business, 
potentially leading to sales force layoffs and placing CS&Co. at a 
competitive disadvantage to other distributors who can offer 
intermediaries a full menu of products. Applicants further represent 
CSIM has committed substantial capital and other resources to 
establishing expertise in advising Funds, and that investment advisory 
services provided to Funds represents more than 94.9% of its assets 
under management (as of March 31, 2018).
    7. Applicants represent that: (1) None of the current or former 
directors, officers or employees involved in Fund Servicing Activities 
of the Fund Servicing Applicants had any involvement in the Conduct; 
(2) none of the CS&Co. employees who were directly responsible for 
determining whether a SAR filing was required for the Advisers had any 
involvement in Fund Servicing Activities, and that no such person 
remains in the employ of any of the Fund Servicing Applicants; and (3) 
because the Conduct did not involve Fund Servicing Activities, 
shareholders of Funds were not affected any differently than if those 
Funds had received services from any other non-affiliated investment 
adviser or principal underwriter.
    8. Applicants represent that CS&Co. has taken substantial remedial 
actions to address the conduct at issue in the Complaint and Final 
Judgment. As further detailed in the Application, such remedial actions 
include improving CS&Co.'s regulatory compliance program with an 
emphasis on SAR compliance, increasing the number of employees 
dedicated to anti-money laundering and fraud prevention (including 
employees with law enforcement backgrounds), and increasing the 
quantity and quality of internal AML and SAR training.
    9. As a result of the foregoing, Applicants submit that granting 
the exemption as requested in the application is consistent with the 
public interest and the protection of investors.
    10. To provide further assurance that the exemptive relief being 
requested herein would be consistent with the public interest and the 
protection of the investors, Applicants agree that they will, as soon 
as reasonably practical following the entry of the Injunction, 
distribute to the boards of trustees of the Funds (``Boards'') written 
materials describing the circumstances that led to the Injunction, as 
well as any impact on the Funds and the application. The written 
materials will include an offer to discuss the materials at an in-
person meeting with the Boards, including the trustees who are not 
``interested persons'' of the Funds as defined in section 2(a)(19) of 
the Act and their ``independent legal counsel'' as defined in rule 0-
1(a)(6) under the Act. Applicants undertake to provide the Boards with 
all information concerning the Injunction and the application as 
necessary for those Funds to fulfill their disclosure and other 
obligations under the U.S. federal securities laws and will provide 
them a copy of the Final Judgment as entered by the District Court.
    11. Applicants state that none of the Applicants nor any of their 
affiliates have previously applied for orders under section 9(c) of the 
Act.

Applicants' Conditions

    Applicants agree that any order granted by the Commission pursuant 
to the application will be subject to the following conditions:
    1. Any temporary exemption granted pursuant to the Application 
shall be without prejudice to, and shall not limit the Commission's 
rights in any manner with respect to, any Commission investigation of, 
or administrative proceedings involving or against, Covered Persons, 
including, without limitation, the consideration by the Commission of a 
permanent exemption

[[Page 32929]]

from section 9(a) of the Act requested pursuant to the Application or 
the revocation or removal of any temporary exemptions granted under the 
Act in connection with the application.
    2. Each Applicant and Covered Person will adopt and implement 
policies and procedures reasonably designed to ensure that it will 
comply with the terms and conditions of the Orders within 60 days of 
the date of the Permanent Order.
    3. CS&Co. will comply with the terms and conditions of the Consent.
    4. The Applicants will provide written notification to the Chief 
Counsel of the Commission's Division of Investment Management with a 
copy to the Chief Counsel of the Commission's Division of Enforcement 
of a material violation of the terms and conditions of the Orders and 
Consent within 30 days of discovery of the material violation.

Temporary Order

    The Commission has considered the matter and finds that Applicants 
have made the necessary showing to justify granting a temporary 
exemption.
    Accordingly,
    It is hereby ordered, pursuant to section 9(c) of the Act, that the 
Applicants and any other Covered Persons are granted a temporary 
exemption from the provisions of section 9(a), effective as of the date 
of the Injunction, solely with respect to the Injunction, subject to 
the representations and conditions in the application, until the 
Commission takes final action on their application for a permanent 
order.

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-15078 Filed 7-13-18; 8:45 am]
 BILLING CODE 8011-01-P
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