Generation Investment Management US LLP and Generation Investment Management LLP, 12298-12301 [2019-06158]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 62 (Monday, April 1, 2019)]
[Notices]
[Pages 12298-12301]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06158]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Advisers Act Release No. 5213/File No. 803-00245]


Generation Investment Management US LLP and Generation Investment 
Management LLP

March 26, 2019.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice.

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    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) 
under the Act.

APPLICANTS: Generation Investment Management US LLP (``Generation US'') 
and Generation Investment Management LLP (``Generation UK'') 
(collectively, ``Generation,'' ``Applicants'' or ``Advisers'').

SUMMARY OF APPLICATION: Applicants request that the Commission issue an 
order under Section 206A of the Act and rule 206(4)-5(e) under the Act 
exempting them from rule 206(4)-5(a)(1) under the Act to permit 
Applicants to receive compensation from a government entity for 
investment advisory services provided to the government entity within 
the two-year period following a contribution by a covered associate of 
the Applicants to an official of the government entity.

FILING DATES: The application was filed on March 1, 2018, and amended 
and restated applications were filed on August 31, 2018, and January 
28, 2019.

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 April 22, 2019, 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

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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: The Commission: Secretary, U.S. Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090. Applicants: 
Generation Investment Management US LLP, 555 Mission Street, Suite 
3400, San Francisco, CA 94105 and Generation Investment Management LLP, 
20 Air Street, 7th Floor, London, UK W1B 5AN.

FOR FURTHER INFORMATION CONTACT: Jean E. Minarick, Senior Counsel, at 
(202) 551- 6811 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. Generation US is a financial services firm registered with the 
Commission as an investment adviser under the Act. Generation UK, the 
99.9 percent owner of Generation US, is an exempt reporting adviser 
under rule 204-4(a) under the Act. The Applicants provide discretionary 
investment advisory services to a wide variety of investors.
    2. The individual who made the campaign contribution that triggered 
the two-year compensation ban (the ``Contribution'') is Colin le Duc 
(the ``Contributor''). The Contributor is a founding partner of 
Generation UK, who also serves on the Management Committee of 
Generation UK, Generation's governing body. On October 4, 2017, 
Generation announced that the Contributor had been appointed Co-
President of Generation US's new office in San Francisco, its U.S. 
headquarters, with joint Management Committee responsibility for the 
office. On June 30, 2018, the Contributor assumed sole responsibility 
for the office after the other Co-President retired. In his current 
capacity as President of Generation US's office (and in his former 
capacity as Co-President of the office), the Contributor is responsible 
for reporting on United States operations to the Management Committee 
and for the culture of the office. As a member of the Management 
Committee of Generation UK and the President (and previously Co-
President) of Generation US's office, the Contributor is, and was at 
the time of the Contribution, an executive officer of the Advisers. 
Applicants submit that, because the Contributor is, and at the time of 
the Contribution was, an executive officer of Generation UK and 
Generation US under rule 206(4)-5(f)(4), he is, and at all relevant 
times was, a covered associate.
    3. The California State Teachers Retirement System (the 
``Client''), one of Generation US's clients, is a government entity in 
the State of California. Generation UK acts as a sub-adviser to 
Generation US with respect to the Client's investments. The Client is a 
``government entity'' as defined in rule 206(4)-5(f)(i).
    4. The recipient of the Contribution was ``Newsom for California--
Governor 2018,'' the campaign committee for the California 
gubernatorial campaign of Gavin Newsom (the ``Official''), who, at the 
time of the Contribution, was the Lieutenant Governor of the State of 
California. The Client is a state pension fund with a twelve-member 
board; one board member is the Director of Finance, who is appointed by 
the Governor of California, and five other board members are directly 
appointed by the Governor of California. Because he was seeking the 
office of Governor at the time of the Contribution, the Official was an 
``official'' of the Client within the meaning of rule 206(4)-
5(f)(6)(ii). The Contribution that triggered rule 206(4)-5's 
prohibition on compensation under rule 206(4)-5(a)(1) was made on June 
7, 2017, for the amount of $5,000. Applicants submit that the 
Contribution was not motivated by any desire to influence the award of 
investment advisory business. The Contribution was made, after the 
Contributor's next-door neighbor sent him, on June 3, 2017, a text 
message inviting him to a fundraising event for the Official's 
gubernatorial campaign. His decision to make the Contribution was 
spontaneous and motivated by his neighbor's request and because the 
Contributor and his neighbor's children attended the same school. 
Applicants represent that the Contributor did not have any 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.
    5. Generation US has been doing business with the Client since 
2007. The investments were all made in 2007 and 2008, before the date 
of the Contribution and before the Official took office. The Client has 
not materially added to its assets under management by the Advisers, 
initiated new mandates, or opened new accounts since 2008, although the 
Client in February 2018 announced that a different Generation 
investment fund that is also not managed by the Contributor was 
eligible to receive a commitment from the Client. Neither the 
Contributor nor anyone whom he supervises was in any way involved in 
soliciting the Client with respect to its current business or with 
respect to the Client's February 2018 announcement that a different 
Generation investment fund was eligible to receive a commitment.
    6. The Applicants learned of the Contribution on December 1, 2017, 
after the Contributor disclosed it in an interview with a regulatory 
compliance firm engaged by the Applicants to complete its annual ``mock 
audit.'' Upon discovery of the Contribution, the Contributor, through 
counsel, requested a refund of the full $5,000 the next business day, 
and received the refund on December 8, 2017. The Applicants established 
an escrow account on February 27, 2018 into which they have been 
depositing an amount equal to the compensation received with respect to 
the Client's investments since the Contribution Date. Applicants submit 
that all management fees and incentive fees earned with respect to the 
Client's investments since the Contribution Date have been placed in 
escrow and will continue to be placed in escrow pending the outcome of 
the application.
    7. The Applicants' pay-to-play Policy (the ``Policy'') was adopted 
and implemented in 2011. The Policy requires that all contributions by 
the Advisers' managing members, executive officer and other ``covered 
associates,'' as well as all employees, partners, spouses and family 
members of ``covered associates,'' to any person (including any 
election committee for the person) who was at the time of the 
contribution an incumbent, candidate or successful candidate for an 
elective office of a government entity are prohibited. There is no de 
minimis exemption from the contribution prohibition. Under the Policy, 
the Advisers circulated multiple compliance alerts reminding employees 
of the Policy and the strict prohibition on political contributions. 
After the discovery of the Contribution, the Advisers updated the 
Policy, which formerly required partners and employees to certify 
annually to their compliance with the Policy, to certify compliance 
with the Policy quarterly. In addition, the Advisers retain a 
compliance vendor to conduct periodic audits and testing of compliance 
with a variety of restrictions, including those covered in the Policy.

[[Page 12300]]

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. 
The Client 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; 
(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 Client 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. Applicant contends 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 the Client's merit-based 
process for the selection or retention of investment advisers, the 
Client's interests are best served by allowing the Advisers and their 
Client to continue their relationship uninterrupted. Applicants state 
that causing the Advisers to serve without compensation for a two-year 
period could result in a financial loss potentially hundreds or 
thousands of 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 implemented 
well before the Contribution was made. Applicants further represent 
that, the Policy is fully compliant with the requirements of rule 
206(4)-5 and has been more rigorous than rule 206(4)-5's requirements 
as the Advisers retain an outside compliance firm to conduct internet 
testing and review compliance with the Policy as part of the firm's 
periodic audit process and requires covered associates to certify their 
compliance with the Policy quarterly.
    8. Applicants assert that aside from the Contributor, no employees 
or covered associates of the Advisers, or any executive or employee of 
the Advisers' affiliates knew of the Contribution.
    9. Applicants assert that after learning of the Contribution, the 
Advisers caused the Contributor to obtain immediately a full refund of 
the Contribution. Applicants have, since the discovery of the 
Contribution updated the Policy to mandate annual live or video-
conference training on the Policy, increased the frequency of the 
internal compliance certifications from annually to quarterly, and 
increased the frequency of quarterly campaign finance database testing 
and reviews from annually to quarterly.
    10. Applicants state that after learning of the Contribution, it 
confirmed that although the Contributor's job would not ordinarily 
cause him to interact with the Client, the Advisers instructed him not 
to solicit or otherwise communicate with the Client for two years 
following the date of the Contribution.
    11. Applicants state that the Client's investments with the 
Advisers substantially pre-date the Contribution. They were made on an 
arms' length basis, and neither the Contributor nor the Advisers took 
any action to obtain any direct or indirect influence from the 
Official. Furthermore, no investments were made in the period between 
the date of the Contribution and the day it was refunded. Applicants 
also submit that the apparent intent in making the Contribution was not 
to influence the selection or retention of the Advisers. Applicants 
represent that the Contributor and the Official have a relationship 
that arises out of the fact that their children were classmates in the 
same primary school. Applicants finally state that it was because of 
that relationship, and the fact that the Contribution was solicited by 
the Contributor's next-door neighbor, and not because of any desire to 
influence the award of investment advisory business that the 
Contributor made the Contribution to the Official's campaign.
    12. Applicants submit that neither the Advisers nor the Contributor 
sought to interfere with the Client's 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

[[Page 12301]]

disproportionate to the mistake that was made.

Applicants' Conditions

    The Applicants agree 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 Advisers with any ``government entity'' client or prospective 
client for which the Official is an ``official,'' each as defined in 
rule 206(4)-5(f) until June 7, 2019.
    2. The Contributor will receive a written notification of this 
condition and will provide a quarterly certification of compliance 
until June 7, 2019. 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 
Advisers, and be available for inspection by the staff of the 
Commission.
    3. The Advisers 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 Advisers, 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,
Deputy Secretary.
[FR Doc. 2019-06158 Filed 3-29-19; 8:45 am]
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