[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
[[Page 12299]]
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 http://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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