Calmwater Asset Management, LLC, 4865-4868 [2023-01397]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[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