Calmwater Asset Management, LLC, 4865-4868 [2023-01397]
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Federal Register / Vol. 88, No. 16 / Wednesday, January 25, 2023 / Notices
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEARCA–2023–07 on the subject
line.
Paper Comments
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• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSEARCA–2023–07. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
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–2023–07 and
should be submitted on or before
February 15, 2023.
16:55 Jan 24, 2023
[FR Doc. 2023–01401 Filed 1–24–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
VerDate Sep<11>2014
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
Sherry R. Haywood,
Assistant Secretary.
Jkt 259001
[Investment Advisers Act Release No. 6221/
File No. 803–00256]
Calmwater Asset Management, LLC
January 19, 2023.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice.
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) under the
Act.
APPLICANT: Calmwater Asset
Management, LLC (‘‘Applicant’’ or
‘‘Adviser’’)
SUMMARY OF APPLICATION: Applicant
requests 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 Applicant 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 Applicant to an
official of the government entity.
FILING DATES: The application was filed
on October 17, 2022.
HEARING OR NOTIFICATION OF HEARING: An
order granting the application will be
issued unless the Commission orders a
hearing. Interested persons may request
a hearing by writing to the
Commission’s Secretary and serving
Applicant with a copy of the request,
personally or by mail. Hearing requests
should be received by the Commission
by 5:30 p.m. on February 13, 2023 and
should be accompanied by proof of
service on Applicant, in the form of an
affidavit or, for lawyers, a certificate of
service. Pursuant to rule 0–5 under the
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.
16 17
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CFR 200.30–3(a)(12).
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The Commission: Secretary,
U.S. Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
Applicant: Calmwater Asset
Management, LLC, 11755 Wilshire
Blvd., #1425, Los Angeles, CA 90025.
FOR FURTHER INFORMATION CONTACT:
Juliet Han, Senior Counsel, at (202) 551–
5213 or Kyle R. Ahlgren, Branch Chief,
at (202) 551–6857 (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.
Applicant’s Representations:
1. Applicant is a Delaware limited
liability company registered with the
Commission as an investment adviser
under the Act. Applicant provides
discretionary investment advisory
services to private funds (the ‘‘Funds’’).
2. One of Applicant’s clients is a
government entity as defined in rule
206(4)–5(f)(5) in the State of Colorado
(the ‘‘Client’’). The Client is a state
pension fund with a board of trustees
(the ‘‘Board’’) that consists of 16
trustees. The Colorado State Treasurer
serves on the Board as an ex officio
voting member, and the Board has the
authority to select the investment
adviser.
3. The individual who made the
campaign contribution that triggered the
two-year compensation ban (the
‘‘Contribution’’) is Larry Grantham (the
‘‘Contributor’’). At the time of the
Contribution, the Contributor was the
Managing Principal of the Adviser, a
position he has held since the Adviser’s
founding in 2015. Thus, the Contributor
was at all relevant times an executive
officer of Applicant and a ‘‘covered
associate,’’ as defined in rule 206(4)–
5(f)(2)(i) under the Act. When a new
fund is in a fundraising cycle, a
placement agent generally introduces
the Adviser to the potential investor and
sets up meetings between them. The
Contributor has historically attended
such meetings with prospective
investors, including occasionally
government entities, e.g., the Client, on
behalf of the Adviser.
4. The recipient of the Contribution
was Brian Watson (the ‘‘Recipient’’), an
entrepreneur who owns and operates a
commercial real estate firm and a
private citizen who unsuccessfully
campaigned for the office of Colorado
State Treasurer in 2018. The Candidate
did not hold a public office at the time
ADDRESSES:
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of the Contribution and, to Applicant’s
knowledge, has never held a public
office before or after the Contribution
nor served in any role that was directly
or indirectly responsible for, or could
influence the outcome of, the hiring of
an investment adviser by a government
entity. Nevertheless, because the
Candidate was seeking the office of
Colorado State Treasurer at the time of
the Contribution, an office that includes
a position as an ex officio voting
member of the sixteen-member Board,
the Candidate is an ‘‘official’’ of the
Client as defined in rule 206(4)–
5(f)(6)(i). The Contribution that triggered
rule 206(4)–5’s prohibition on
compensation under rule 206(4)–5(a)(1)
was made on November 6, 2018 for the
amount of $250. The Contributor did
not solicit or coordinate any other
contributions for the Candidate. The
Contribution was made for personal
reasons based on the Contributor’s
friendship with the Candidate, which
grew out of the professional relationship
in commercial real estate lending and
their shared interests in the outdoors,
wildlife and environmental
conservation. Applicant represents that
the Contributor had no intention to
seek, and no action was taken either by
the Contributor or Applicant to obtain,
any direct or indirect influence from the
Candidate or any other person regarding
the Client’s decision-making.
5. The Client made its initial
investment commitment to one of the
Funds in May 2017, approximately 18
months before the November 6, 2018
Contribution Date, which is also the
date that the Candidate lost the election.
In March 2021, approximately 27
months after the Contribution Date and
approximately 14 months after the
return of the Contribution to the
Contributor, the Client made a
subsequent investment commitment to a
new Fund. Applicant represents that at
no point did the Candidate hold public
office or have direct or indirect
influence with the Board regarding the
Client’s selection of investment
advisers, and at no point did the
Contributor intend to influence the
Candidate regarding the Client’s
investments in the Funds.
6. Applicant represents that the
Contributor attempted to pre-clear the
$250 Contribution by: (i) orally
requesting pre-approval from the then
chief-compliance officer; and (ii)
following up via email with a written
pre-approval request on November 5,
2018. On December 13, 2018, the
Contributor completed and submitted
the Adviser’s Political Contribution
Disclosure Form to disclose the
Contribution as required under
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Applicant’s Political Contributions
Policy (the ‘‘Policy’’). The then-chief
compliance officer forwarded the preapproval request email to a designee,
expecting the designee to confirm the
permissibility of the Contribution with
the Adviser’s then-compliance
consultant, but the inquiry as to the
permissibility was not completed. On
November 6, 2018, the Contributor
believed that he had received oral preapproval from the then-chief
compliance officer and, when he did not
hear otherwise, assumed that the
Contribution was approved and made
the Contribution. The Contributor did
not complete pre-clearance through the
Adviser’s compliance software tool (the
‘‘Tool’’) as required by the Adviser’s
Policy because the Contributor believed
that the then-chief compliance officer
had sufficient written pre-clearance
information via email.
7. The then-chief compliance officer
remained unaware that the Contributor
had made the Contribution until
December 2018, when the thencompliance consultant discovered the
Contribution during an annual review
that included the assessment of certain
reports generated by the Tool. The thencompliance consultant brought the
Contribution to the attention of the
then-chief compliance officer. After a
review, the then-chief compliance
officer determined that, absent an
exemption, the Contribution violated
the Rule and informed the Contributor.
The Contributor requested a return of
the Contribution from the Candidate by
phone on or about January 11, 2020, and
the Contributor received a full refund of
the Contribution ($250) on or about
January 27, 2020. Applicant created an
escrow account on July 14, 2021 and
escrowed advisory fees from the Client
of $1.6 million. Applicant will continue
to deposit fees that accrue from the
Client’s investments into the escrow
account pending the outcome of the
Application.
8. Since its registration with the
Commission as an investment adviser in
2017, Applicant has maintained and
updated the Policy. On the Contribution
Date, the Policy required that ‘‘covered
associates’’ (defined to include all
employees), all of whom were aware
that they were subject to the Policy,
request and receive written pre-approval
by the chief compliance officer with
respect to all political contributions
made by each covered associate and
each covered associate’s spouse to a
state or local political office, political
candidate, political party or political
action committee. The Policy further
stated that all covered associates are
required to submit pre-approval
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requests to the chief compliance officer
via the Tool. Between its registration in
2017 and the Contribution Date, the
Adviser conducted training sessions
regarding the Compliance Manual,
including the Policy, and informed the
Adviser’s employees that they were
subject to the Policy’s requirements. All
employees are required to attend the
trainings, initially upon joining the firm
and on an annual basis. The Adviser
collects acknowledgements from the
employees regarding their familiarity
and compliance with the Compliance
Manual, including the Policy, and their
attendance at the training. The
Contributor had attended all such
required trainings since the Adviser’s
registration in 2017 and provided all
related acknowledgements. Prior to the
Contribution, the Adviser had engaged a
compliance consultant to annually
review and test its compliance program
and compliance systems, make
recommendations and implement
changes, as appropriate, and conduct
training for the employees on rule
206(4)–5, the Policy and other
compliance topics, as needed.
9. Following the then-compliance
consultant’s discovery of the
Contribution in December 2019,
Applicant engaged in reactive and
remedial measures including
conducting a comprehensive search for
any other political contributions by the
Adviser’s covered associates and hiring
a monitoring service to check the names
of the Adviser’s employees against
political contribution databases on a
daily basis. The Adviser also updated
the Policy to allow for political
contribution pre-authorization requests
to be sent to the chief compliance officer
via email and to add quarterly
certifications from employees regarding
political contributions. The Adviser
installed an upgraded version of the
Tool in early May 2021. The Adviser
further amended its compliance manual
to implement procedures to identify and
monitor the political contributions of
covered associates including a review
conducted on a quarterly basis by the
Adviser’s compliance department.
Applicant’s 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
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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. Applicant requests 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
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16:55 Jan 24, 2023
Jkt 259001
provided to the Client within the twoyear period following the Contribution.
5. Applicant submits that the
exemption is necessary and appropriate
in the public interest and consistent
with the protection of investors and the
purposes fairly intended by the policy
and provisions of the Act. Applicant
further submits that the other factors set
forth in rule 206(4)–5(e) similarly weigh
in favor of granting an exemption to
Applicant 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 Adviser or the
Contributor intended to, or actually did,
interfere with the Client’s process for
the selection or retention of advisory
services, the interests of the Client are
best served by allowing the Adviser and
the Client to continue their relationship
uninterrupted. Applicant states that
causing the Adviser to serve without
compensation for the remainder of the
two-year period could result in a
financial loss of between $3.3 million
and $4.2 million, approximately
13,200–16,800 times the amount of the
Contribution. Applicant suggests 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. Applicant represents that since its
registration in 2017, the Adviser
adopted and implemented the Policy
which it believes was reasonably
designed to prevent violations of rule
206(4)–5. Applicant represents that it
has amended its Policy to implement
enhanced procedures to, among other
things, search federal and state
campaign contribution databases on a
daily basis to seek to identify and
monitor any political contributions of
covered associates.
8. Applicant asserts that before
making the Contribution, the
Contributor: (i) orally requested preapproval from the then-chief
compliance officer to make the
Contribution, (ii) followed up via email
with a written pre-approval request to
the then-chief compliance officer on
November 5, 2018 to approve of the
Contribution, and (iii) made the
Contribution of $250 on November 6,
2018. The Contributor did not seek preclearance through the Tool, as specified
in the Policy, because the Contributor
believed that the then-chief compliance
officer had sufficient written preclearance information via email. The
then-chief compliance officer forwarded
the pre-approval request email to a
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4867
designee, expecting the designee to
confirm the permissibility of the
Contribution with Applicant’s thencompliance consultant, but the inquiry
as to permissibility was not completed.
The then-compliance consultant
discovered the contribution during a
compliance review in December 2019.
Applicant represents that the then-chief
compliance officer remained unaware
the Contribution had been made until
the then-compliance consultant
discovered the Contribution during the
course of Applicant’s annual review in
December 2019 and informed the thenchief compliance officer.
9. Applicant asserts that after learning
of the Contribution, the then-chief
compliance officer consulted outside
counsel and undertook remedial
measures, including informing the
Contributor of the violation. The
Contributor promptly requested a return
of the Contribution from the Candidate
by phone, and the Contributor received
a check refunding the full amount on or
about January 27, 2020. In addition,
Applicant replaced the then-chief
compliance officer with a new
outsourced chief compliance officer.
Applicant states that it also updated the
Policy to allow for political contribution
pre-authorization requests to be sent to
the chief compliance officer via email
and to add quarterly certifications from
employees regarding political
contributions. Applicant states that it
has also installed an upgraded version
of the Tool in early May 2021.
Applicant states it has amended its
compliance manual to implement
procedures to identify and monitor the
political contributions of covered
associates.
10. Applicant states that the Client
determined to invest with Applicant
and established its advisory relationship
on an arm’s length basis approximately
18 months before the date of the
Contribution free from any improper
influence as a result of the Contribution.
The Client’s only subsequent
investment with Applicant was
approximately 27 months after the
Contribution Date and approximately 14
months after the Candidate had returned
the Contribution to the Contributor.
Applicant also notes that the Candidate
lost the election, and is a private citizen
who, to Applicant’s knowledge, never
held public office or had any influence
with respect to the Board. Applicant
further represents that the Contributor’s
decision to make the Contribution to the
Recipient was based on the
Contributor’s ideological beliefs and
friendship with the Recipient, and not
any desire to influence the Client’s
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award or retention of investment
advisory business.
11. Applicant submits that neither the
Adviser nor the Contributor sought to
interfere with the Client’s selection or
retention process for advisory services,
nor did they seek to negotiate higher
fees or greater ancillary benefits.
Applicant further submits that there was
no violation of the Adviser’s fiduciary
duty to deal fairly or disclose material
conflicts given the absence of any intent
or action by the Adviser or the
Contributor to influence the Client’s
selection process. Applicant contends
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.
Applicant’s Conditions
Applicant agrees that any order of the
Commission granting the requested
relief will be subject to the following
conditions:
1. The Adviser will appoint an
independent compliance consultant to
annually review and test its compliance
program and compliance systems,
including the Adviser’s Policy, to
ensure that they are reasonably designed
to prevent violations of the Act and the
rules thereunder. The Adviser will
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
Adviser, and be available for inspection
by the staff of the Commission.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96707; File No. SR–ICC–
2023–001]
3 15
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January 19, 2023.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 1 and
Rule 19b–4,2 notice is hereby given that
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U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(2).
5 Pursuant to an Index Option contract, one party
(the ‘‘Swaption Buyer’’) has the right (but not the
obligation) to cause the other party (the ‘‘Swaption
Seller’’) to enter into an index credit default swap
transaction at a pre-determined strike price on a
specified expiration date on specified terms. In the
case of Index Options that may be cleared by ICC,
the underlying index credit default swap is limited
to certain CDX and iTraxx index credit default
swaps that are accepted for clearing by ICC, and
which would be automatically cleared by ICC upon
exercise of the Index Option by the Swaption Buyer
in accordance with its terms.
6 CP fee details available at: https://
www.theice.com/publicdocs/clear_credit/ICE_
Clear_Credit_Fees_Clearing_Participant.pdf.
4 17
Self-Regulatory Organizations; ICE
Clear Credit LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Relating to ICC’s Fee
Schedules
U.S.C. 78s(b)(1).
CFR 240.19b–4.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, ICC
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. ICC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of these statements.
(a) Purpose
The proposed changes are intended to
modify ICC’s fee schedules to
implement reduced fees for Index
Options for the remainder of calendar
year 2023.5 ICC maintains a Clearing
Participant (‘‘CP’’) fee schedule 6 and
[FR Doc. 2023–01397 Filed 1–24–23; 8:45 am]
2 17
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The principal purpose of the
proposed rule change is to modify ICC’s
fee schedules to implement reduced fees
for credit default index swaptions
(‘‘Index Options’’) for the remainder of
calendar year 2023. These revisions do
not require any changes to the ICC
Clearing Rules.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
For the Commission, by the Division of
Investment Management, under delegated
authority.
Sherry R. Haywood,
Assistant Secretary.
1 15
on January 5, 2023, ICE Clear Credit LLC
(‘‘ICC’’) filed with the Securities and
Exchange Commission the proposed
rule change as described in Items I, II
and III below, which Items have been
prepared primarily by ICC. ICC filed the
proposed rule change pursuant to
Section 19(b)(3)(A) of the Act 3 and Rule
19b–4(f)(2) thereunder,4 such that the
proposed rule change was immediately
effective upon filing with the
Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
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client fee schedule 7 (collectively, the
‘‘fee schedules’’) that are publicly
available on its website, which ICC
proposes to update. Clearing fees are
due by CPs and clients in accordance
with the product, amount and currency
set out in the fee schedules and subject
to any incentive program described in
the fee schedules. The proposed
changes to the fee schedules are set
forth in Exhibit 5A and Exhibit 5B and
described in detail as follows. ICC
proposes to make such changes effective
January 5, 2023 (the ‘‘Effective Date’’),
subject to the completion of any
applicable regulatory review process.
The amended CP fee schedule would
reduce Index Option fees to $1.5/
million or Ö1.5/million for the
remainder of calendar year 2023. Under
the regular CP fee schedule, Index
Option fees are $3/million or Ö3/
million, subject to an incentive program
that provides a tiered discount schedule
based on U.S. Dollar equivalent, nondiscounted Index Option fees billed
since the start of the year.8 ICC also
discounted CP Index Option fees for a
portion of 2022, which expired at the
end of calendar year 2022.9 Under the
proposed changes, in addition to
updating the fee table, ICC would
include a footnote to indicate that the
listed fees of $1.5/million or Ö1.5/
million are applicable from the Effective
Date through calendar year 2023 and
reflect a discount from ICC’s regular
Index Option fees of $3/million or Ö3/
million. On the first business day of
2024, ICC would remove this discount
and the listed fees would revert to ICC’s
regular Index Option fees on this
schedule dated January 2024.
The amended client fee schedule
would reduce Index Option fees to $2/
million or Ö2/million for the remainder
of calendar year 2023. Under the regular
client fee schedule, Index Option fees
are $4/million or Ö4/million. ICC also
discounted client Index Option fees for
a portion of 2022, which expired at the
end of calendar year 2022.10 Under the
proposed changes, in addition to
updating the fee table, ICC would
7 Client fee details available at: https://
www.theice.com/publicdocs/clear_credit/ICE_
Clear_Credit_Fees.pdf. As specified, all fees are
charged directly to a client’s CP.
8 A description of this incentive program is
included in a prior filing. SEC Release No. 34–
90524 (November 27, 2020) (notice), 85 FR 78157
(December 3, 2020) (SR–ICC–2020–013).
9 A description of the 2022 CP Index Option fee
discount is included in prior SEC filing Release No.
34–94330 (February 28, 2022) (notice), 87 FR 12508
(March 4, 2022) (SR–ICC–2022–001).
10 A description of the 2022 client Index Option
fee discount is included in prior SEC filing Release
No. 34–94330 (February 28, 2022) (notice), 87 FR
12508 (March 4, 2022) (SR–ICC–2022–001).
E:\FR\FM\25JAN1.SGM
25JAN1
Agencies
[Federal Register Volume 88, Number 16 (Wednesday, January 25, 2023)]
[Notices]
[Pages 4865-4868]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-01397]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Advisers Act Release No. 6221/File No. 803-00256]
Calmwater Asset Management, LLC
January 19, 2023.
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.
Applicant: Calmwater Asset Management, LLC (``Applicant'' or
``Adviser'')
Summary of Application: Applicant requests 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
Applicant 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
Applicant to an official of the government entity.
Filing Dates: The application was filed on October 17, 2022.
Hearing or Notification of Hearing: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Commission's Secretary
and serving Applicant with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on February 13, 2023 and should be accompanied by proof of service
on Applicant, in the form of an affidavit or, for lawyers, a
certificate of service. Pursuant to rule 0-5 under the 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: The Commission: Secretary, U.S. Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090. Applicant:
Calmwater Asset Management, LLC, 11755 Wilshire Blvd., #1425, Los
Angeles, CA 90025.
FOR FURTHER INFORMATION CONTACT: Juliet Han, Senior Counsel, at (202)
551-5213 or Kyle R. Ahlgren, Branch Chief, at (202) 551-6857 (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.
Applicant's Representations:
1. Applicant is a Delaware limited liability company registered
with the Commission as an investment adviser under the Act. Applicant
provides discretionary investment advisory services to private funds
(the ``Funds'').
2. One of Applicant's clients is a government entity as defined in
rule 206(4)-5(f)(5) in the State of Colorado (the ``Client''). The
Client is a state pension fund with a board of trustees (the ``Board'')
that consists of 16 trustees. The Colorado State Treasurer serves on
the Board as an ex officio voting member, and the Board has the
authority to select the investment adviser.
3. The individual who made the campaign contribution that triggered
the two-year compensation ban (the ``Contribution'') is Larry Grantham
(the ``Contributor''). At the time of the Contribution, the Contributor
was the Managing Principal of the Adviser, a position he has held since
the Adviser's founding in 2015. Thus, the Contributor was at all
relevant times an executive officer of Applicant and a ``covered
associate,'' as defined in rule 206(4)-5(f)(2)(i) under the Act. When a
new fund is in a fundraising cycle, a placement agent generally
introduces the Adviser to the potential investor and sets up meetings
between them. The Contributor has historically attended such meetings
with prospective investors, including occasionally government entities,
e.g., the Client, on behalf of the Adviser.
4. The recipient of the Contribution was Brian Watson (the
``Recipient''), an entrepreneur who owns and operates a commercial real
estate firm and a private citizen who unsuccessfully campaigned for the
office of Colorado State Treasurer in 2018. The Candidate did not hold
a public office at the time
[[Page 4866]]
of the Contribution and, to Applicant's knowledge, has never held a
public office before or after the Contribution nor served in any role
that was directly or indirectly responsible for, or could influence the
outcome of, the hiring of an investment adviser by a government entity.
Nevertheless, because the Candidate was seeking the office of Colorado
State Treasurer at the time of the Contribution, an office that
includes a position as an ex officio voting member of the sixteen-
member Board, the Candidate is an ``official'' of the Client as defined
in rule 206(4)-5(f)(6)(i). The Contribution that triggered rule 206(4)-
5's prohibition on compensation under rule 206(4)-5(a)(1) was made on
November 6, 2018 for the amount of $250. The Contributor did not
solicit or coordinate any other contributions for the Candidate. The
Contribution was made for personal reasons based on the Contributor's
friendship with the Candidate, which grew out of the professional
relationship in commercial real estate lending and their shared
interests in the outdoors, wildlife and environmental conservation.
Applicant represents that the Contributor had no intention to seek, and
no action was taken either by the Contributor or Applicant to obtain,
any direct or indirect influence from the Candidate or any other person
regarding the Client's decision-making.
5. The Client made its initial investment commitment to one of the
Funds in May 2017, approximately 18 months before the November 6, 2018
Contribution Date, which is also the date that the Candidate lost the
election. In March 2021, approximately 27 months after the Contribution
Date and approximately 14 months after the return of the Contribution
to the Contributor, the Client made a subsequent investment commitment
to a new Fund. Applicant represents that at no point did the Candidate
hold public office or have direct or indirect influence with the Board
regarding the Client's selection of investment advisers, and at no
point did the Contributor intend to influence the Candidate regarding
the Client's investments in the Funds.
6. Applicant represents that the Contributor attempted to pre-clear
the $250 Contribution by: (i) orally requesting pre-approval from the
then chief-compliance officer; and (ii) following up via email with a
written pre-approval request on November 5, 2018. On December 13, 2018,
the Contributor completed and submitted the Adviser's Political
Contribution Disclosure Form to disclose the Contribution as required
under Applicant's Political Contributions Policy (the ``Policy''). The
then-chief compliance officer forwarded the pre-approval request email
to a designee, expecting the designee to confirm the permissibility of
the Contribution with the Adviser's then-compliance consultant, but the
inquiry as to the permissibility was not completed. On November 6,
2018, the Contributor believed that he had received oral pre-approval
from the then-chief compliance officer and, when he did not hear
otherwise, assumed that the Contribution was approved and made the
Contribution. The Contributor did not complete pre-clearance through
the Adviser's compliance software tool (the ``Tool'') as required by
the Adviser's Policy because the Contributor believed that the then-
chief compliance officer had sufficient written pre-clearance
information via email.
7. The then-chief compliance officer remained unaware that the
Contributor had made the Contribution until December 2018, when the
then-compliance consultant discovered the Contribution during an annual
review that included the assessment of certain reports generated by the
Tool. The then-compliance consultant brought the Contribution to the
attention of the then-chief compliance officer. After a review, the
then-chief compliance officer determined that, absent an exemption, the
Contribution violated the Rule and informed the Contributor. The
Contributor requested a return of the Contribution from the Candidate
by phone on or about January 11, 2020, and the Contributor received a
full refund of the Contribution ($250) on or about January 27, 2020.
Applicant created an escrow account on July 14, 2021 and escrowed
advisory fees from the Client of $1.6 million. Applicant will continue
to deposit fees that accrue from the Client's investments into the
escrow account pending the outcome of the Application.
8. Since its registration with the Commission as an investment
adviser in 2017, Applicant has maintained and updated the Policy. On
the Contribution Date, the Policy required that ``covered associates''
(defined to include all employees), all of whom were aware that they
were subject to the Policy, request and receive written pre-approval by
the chief compliance officer with respect to all political
contributions made by each covered associate and each covered
associate's spouse to a state or local political office, political
candidate, political party or political action committee. The Policy
further stated that all covered associates are required to submit pre-
approval requests to the chief compliance officer via the Tool. Between
its registration in 2017 and the Contribution Date, the Adviser
conducted training sessions regarding the Compliance Manual, including
the Policy, and informed the Adviser's employees that they were subject
to the Policy's requirements. All employees are required to attend the
trainings, initially upon joining the firm and on an annual basis. The
Adviser collects acknowledgements from the employees regarding their
familiarity and compliance with the Compliance Manual, including the
Policy, and their attendance at the training. The Contributor had
attended all such required trainings since the Adviser's registration
in 2017 and provided all related acknowledgements. Prior to the
Contribution, the Adviser had engaged a compliance consultant to
annually review and test its compliance program and compliance systems,
make recommendations and implement changes, as appropriate, and conduct
training for the employees on rule 206(4)-5, the Policy and other
compliance topics, as needed.
9. Following the then-compliance consultant's discovery of the
Contribution in December 2019, Applicant engaged in reactive and
remedial measures including conducting a comprehensive search for any
other political contributions by the Adviser's covered associates and
hiring a monitoring service to check the names of the Adviser's
employees against political contribution databases on a daily basis.
The Adviser also updated the Policy to allow for political contribution
pre-authorization requests to be sent to the chief compliance officer
via email and to add quarterly certifications from employees regarding
political contributions. The Adviser installed an upgraded version of
the Tool in early May 2021. The Adviser further amended its compliance
manual to implement procedures to identify and monitor the political
contributions of covered associates including a review conducted on a
quarterly basis by the Adviser's compliance department.
Applicant's 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
[[Page 4867]]
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. Applicant requests 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. Applicant submits that the exemption is necessary and
appropriate in the public interest and consistent with the protection
of investors and the purposes fairly intended by the policy and
provisions of the Act. Applicant further submits that the other factors
set forth in rule 206(4)-5(e) similarly weigh in favor of granting an
exemption to Applicant 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 Adviser or the Contributor
intended to, or actually did, interfere with the Client's process for
the selection or retention of advisory services, the interests of the
Client are best served by allowing the Adviser and the Client to
continue their relationship uninterrupted. Applicant states that
causing the Adviser to serve without compensation for the remainder of
the two-year period could result in a financial loss of between $3.3
million and $4.2 million, approximately 13,200-16,800 times the amount
of the Contribution. Applicant suggests 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. Applicant represents that since its registration in 2017, the
Adviser adopted and implemented the Policy which it believes was
reasonably designed to prevent violations of rule 206(4)-5. Applicant
represents that it has amended its Policy to implement enhanced
procedures to, among other things, search federal and state campaign
contribution databases on a daily basis to seek to identify and monitor
any political contributions of covered associates.
8. Applicant asserts that before making the Contribution, the
Contributor: (i) orally requested pre-approval from the then-chief
compliance officer to make the Contribution, (ii) followed up via email
with a written pre-approval request to the then-chief compliance
officer on November 5, 2018 to approve of the Contribution, and (iii)
made the Contribution of $250 on November 6, 2018. The Contributor did
not seek pre-clearance through the Tool, as specified in the Policy,
because the Contributor believed that the then-chief compliance officer
had sufficient written pre-clearance information via email. The then-
chief compliance officer forwarded the pre-approval request email to a
designee, expecting the designee to confirm the permissibility of the
Contribution with Applicant's then-compliance consultant, but the
inquiry as to permissibility was not completed. The then-compliance
consultant discovered the contribution during a compliance review in
December 2019. Applicant represents that the then-chief compliance
officer remained unaware the Contribution had been made until the then-
compliance consultant discovered the Contribution during the course of
Applicant's annual review in December 2019 and informed the then-chief
compliance officer.
9. Applicant asserts that after learning of the Contribution, the
then-chief compliance officer consulted outside counsel and undertook
remedial measures, including informing the Contributor of the
violation. The Contributor promptly requested a return of the
Contribution from the Candidate by phone, and the Contributor received
a check refunding the full amount on or about January 27, 2020. In
addition, Applicant replaced the then-chief compliance officer with a
new outsourced chief compliance officer. Applicant states that it also
updated the Policy to allow for political contribution pre-
authorization requests to be sent to the chief compliance officer via
email and to add quarterly certifications from employees regarding
political contributions. Applicant states that it has also installed an
upgraded version of the Tool in early May 2021. Applicant states it has
amended its compliance manual to implement procedures to identify and
monitor the political contributions of covered associates.
10. Applicant states that the Client determined to invest with
Applicant and established its advisory relationship on an arm's length
basis approximately 18 months before the date of the Contribution free
from any improper influence as a result of the Contribution. The
Client's only subsequent investment with Applicant was approximately 27
months after the Contribution Date and approximately 14 months after
the Candidate had returned the Contribution to the Contributor.
Applicant also notes that the Candidate lost the election, and is a
private citizen who, to Applicant's knowledge, never held public office
or had any influence with respect to the Board. Applicant further
represents that the Contributor's decision to make the Contribution to
the Recipient was based on the Contributor's ideological beliefs and
friendship with the Recipient, and not any desire to influence the
Client's
[[Page 4868]]
award or retention of investment advisory business.
11. Applicant submits that neither the Adviser nor the Contributor
sought to interfere with the Client's selection or retention process
for advisory services, nor did they seek to negotiate higher fees or
greater ancillary benefits. Applicant further submits that there was no
violation of the Adviser's fiduciary duty to deal fairly or disclose
material conflicts given the absence of any intent or action by the
Adviser or the Contributor to influence the Client's selection process.
Applicant contends 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.
Applicant's Conditions
Applicant agrees that any order of the Commission granting the
requested relief will be subject to the following conditions:
1. The Adviser will appoint an independent compliance consultant to
annually review and test its compliance program and compliance systems,
including the Adviser's Policy, to ensure that they are reasonably
designed to prevent violations of the Act and the rules thereunder. The
Adviser will 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 Adviser, and be available for inspection by the staff of the
Commission.
For the Commission, by the Division of Investment Management,
under delegated authority.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-01397 Filed 1-24-23; 8:45 am]
BILLING CODE 8011-01-P