80 FR 39474 - Macquarie Capital (USA) Inc., et al.; Notice of Application and Temporary Order

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 131 (July 9, 2015)

[Federal Register Volume 80, Number 131 (Thursday, July 9, 2015)]
[Notices]
[Pages 39474-39477]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-16812]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-31704; File No. 812-14460]


Macquarie Capital (USA) Inc., et al.; Notice of Application and 
Temporary Order

July 6, 2015.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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Summary of Application: Applicants have received a temporary order 
(``Temporary Order'') exempting them from section 9(a) of the Act, with 
respect to an injunction entered against Macquarie Capital (USA) Inc. 
(``Macquarie Capital'') on April 1, 2015 by the United States District 
Court for the Southern District of New York (``District Court''), until 
the Commission takes final action on an application for a permanent 
order (the ``Permanent Order,'' and with the Temporary Order, the 
``Orders''). Applicants also have applied for a Permanent Order.

Applicants: Macquarie Capital, Delaware Management Business Trust 
(``DMBT''), on behalf of its series, Delaware Management Company 
(``DMC'') and Delaware Investments Fund Advisers (``DIFA''), Four 
Corners Capital Management, LLC (``FCCM''), Macquarie Capital 
Investment Management LLC (``MCIM''), Macquarie Funds Management Hong 
Kong Limited (``MFMHK''), and Delaware Distributors, L.P. (``Delaware 
Distributors'') (collectively, the ``Applicants'').

Filing Dates: The application was filed on May 15, 2015 and amended on 
June 10, 2015.

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 July 31, 2015, and should be accompanied by proof of service on 
Applicants, in the form of an affidavit, or for lawyers, a certificate 
of service. Pursuant to rule 0-5 under the Act, hearing requests should 
state the nature of the writer's interest, any facts bearing upon the 
desirability of a hearing on the matter, the reason for the request, 
and the issues contested. Persons who wish to be notified of a hearing 
may request notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street NE., Washington, DC 20549-1090; Applicants: Macquarie Capital 
and MCIM: 125 West 55th Street, 22nd Floor, New York, NY 10019, DMBT, 
FCCM and Delaware Distributors: 2005 Market Street, Philadelphia, PA 
19103, and MFMHK: One International Finance Center, 1 Harbour View 
Street, Central, Hong Kong SAR.

FOR FURTHER INFORMATION CONTACT: Robert H. Shapiro, Senior Counsel, at 
(202) 551-7758, or Mary Kay Frech, Branch Chief, at (202) 551-6821 
(Division of Investment Management, Chief Counsel's Office).

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

Applicants' Representations

    1. Macquarie Capital, a Delaware corporation, is an indirect, 
wholly-owned subsidiary of Macquarie Group Limited (``MGL'') and a 
broker-dealer registered under the Securities Exchange Act of 1934 (the 
``Exchange Act''). MCIM, a Delaware limited liability company, is an 
indirect, wholly-owned subsidiary of MGL and an investment adviser 
registered under the Investment Advisers Act of 1940 (the ``Advisers 
Act''). DMC and DIFA are series of DMBT, which is a Delaware statutory 
trust and an indirect, wholly-owned subsidiary of MGL. DMBT is an 
investment adviser registered under the Advisers Act. FCCM, a Delaware 
limited liability company, is a wholly-owned subsidiary of a series of 
DMBT and an investment adviser registered under the Advisers Act. 
Delaware Distributors, a Delaware limited partnership, is an indirect, 
wholly-owned subsidiary of MGL and a broker-dealer registered under the 
Exchange Act. MFMHK is an indirect, wholly-owned subsidiary of MGL and 
an investment adviser registered under the Advisers Act. DMC and DIFA, 
as series of DMBT, MCIM, FCCM, and MFMHK (collectively, the ``Adviser 
Applicants'') each serve as investment adviser or investment sub-
adviser to investment companies registered under the Act, or series of 
such companies (each, a ``Fund'') \1\ and

[[Page 39475]]

Delaware Distributors provides principal underwriting services to 
certain Funds. The Adviser Applicants and Delaware Distributers are 
collectively referred to as the ``Fund Servicing Applicants.''
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    \1\ The term ``Fund'' refers to any registered investment 
company, including any registered unit investment trust (``UIT'') or 
registered face amount certificate company (``FACC''), as well as 
any business development company and employees' securities company.
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    2. While no existing company of which Macquarie Capital is an 
affiliated person within the meaning of section 2(a)(3) of the Act 
(``Affiliated Person''), other than the Fund Servicing Applicants, 
currently serves as an investment adviser or depositor of any Fund or 
principal underwriter (as defined in section 2(a)(29) of the Act) for 
any open-end registered investment company (``Open-End Fund''), 
registered UIT, or registered FACC (such activities, ``Fund Services 
Activities''), Applicants request that any relief granted also apply to 
any existing company of which Macquarie Capital is an Affiliated Person 
and to any other company of which Macquarie Capital may become an 
Affiliated Person in the future (together with the Fund Servicing 
Applicants, the ``Covered Persons'') \2\ with respect to any activity 
contemplated by section 9(a) of the Act.
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    \2\ Macquarie Capital is a party to the application, but does 
not and will not engage in Fund Services Activities, and is not a 
Covered Person.
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    3. On March 27, 2015, the Commission filed a complaint (the 
``Complaint'') in the District Court. According to the Complaint, 
Macquarie Capital was the lead underwriter on a 2010 secondary public 
stock offering by Puda Coal, Inc. (``Puda Coal''), which traded on the 
New York Stock Exchange at the time and purportedly owned a coal 
company in the People's Republic of China. According to the Complaint, 
in the offering documents, Puda Coal falsely claimed that it held a 90-
percent ownership interest in the Chinese coal company. According to 
the Complaint, Macquarie Capital repeated those statements in its 
marketing materials for the offering despite obtaining a report showing 
that Puda Coal did not possess an ownership interest in the coal 
company. The Complaint alleges that two former Macquarie Capital 
employees were negligent by failing to act on due diligence information 
about the true ownership interest in the Chinese coal company and 
instead moving forward with the offering.\3\ The Complaint alleges that 
Macquarie Capital was negligent as an organization by underwriting and 
marketing the offering while in possession of this information.
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    \3\ The Commission also charged former Macquarie Capital 
managing director Aaron Black and former Macquarie Capital 
investment banker William Fang for failing to exercise appropriate 
care in their due diligence review. Black and Fang each consented to 
the entry of court orders containing the same injunctions as the 
Court Order (as defined below).
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    4. On April 1, 2015, the District Court entered an order (the 
``Court Order'') enjoining Macquarie Capital from violating sections 
17(a)(2) and 17(a)(3) of the Securities Act of 1933 (the 
``Injunction'').\4\ The Court Order also requires Macquarie Capital to 
pay $12 million in disgorgement and prejudgment interest and a civil 
monetary penalty in the amount of $3 million. Macquarie Capital 
consented to the entry of the Court Order without admitting or denying 
the allegations in the Complaint (other than those relating to the 
jurisdiction of the District Court and the jurisdiction of the 
Commission over the Conduct \5\).
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    \4\ Securities and Exchange Commission v. Macquarie Capital 
(USA) Inc., et al., Civil Action No. 15-CV-02304 (S.D.N.Y. April 1, 
2015) (Final Judgment as to Defendant Macquarie Capital (USA) Inc.).
    \5\ The alleged conduct giving rise to the Injunction is 
referred to herein as the ``Conduct.''
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    5. Applicants represent that escrow accounts have been established 
into which have been or will be deposited amounts equal to the advisory 
fees paid by the Funds to the Adviser Applicants for the period from 
April 1, 2015 through May 15, 2015.

Applicants' Legal Analysis

    1. Section 9(a)(2) of the Act, in relevant part, prohibits a person 
who has been enjoined from engaging in or continuing any conduct or 
practice in connection with the purchase or sale of a security, or in 
connection with activities as an underwriter, broker or dealer, from 
acting, among other things, as an investment adviser or depositor of 
any registered investment company or a principal underwriter for any 
Open-End Fund, UIT or FACC. Section 9(a)(3) of the Act makes the 
prohibition in section 9(a)(2) applicable to a company, any affiliated 
person of which has been disqualified under the provisions of section 
9(a)(2). Section 2(a)(3) of the Act defines ``affiliated person'' to 
include, among others, any person directly or indirectly controlling, 
controlled by, or under common control with, the other person. 
Applicants state that, taken together, sections 9(a)(2) and 9(a)(3) 
have the effect of precluding the Fund Servicing Applicants and Covered 
Persons from engaging in Fund Services Activities as a result of the 
Injunction entered against Macquarie Capital because Macquarie Capital 
is an Affiliated Person of each Fund Servicing Applicant and Covered 
Person.
    2. Section 9(c) of the Act provides that, upon application, the 
Commission shall by order grant an exemption from the disqualification 
provisions of section 9(a) of the Act, either unconditionally or on an 
appropriate temporary or other conditional basis, to any person if that 
person establishes that: (a) The prohibitions of section 9(a), as 
applied to the person, are unduly or disproportionately severe or (b) 
the conduct of the person has been such as not to make it against the 
public interest or the protection of investors to grant the exemption. 
Applicants have filed an application pursuant to section 9(c) seeking a 
Temporary Order and a Permanent Order exempting the Fund Servicing 
Applicants and other Covered Persons from the disqualification 
provisions of section 9(a) of the Act. The Fund Servicing Applicants 
and other Covered Persons may, if the relief is granted, in the future 
act in any of the capacities contemplated by section 9(a) of the Act 
subject to the applicable terms and conditions of the Orders. On May 
15, 2015, Applicants received a temporary conditional order from the 
Commission exempting the Covered Persons from section 9(a) of the Act 
with respect to the Injunction from May 15, 2015 until the Commission 
takes final action on an application for a Permanent Order or, if 
earlier, July 14, 2015.
    3. Applicants believe they meet the standards for exemption 
specified in section 9(c). Applicants state that the prohibitions of 
section 9(a) as applied to them would be unduly and disproportionately 
severe and that the conduct of Applicants has not been such as to make 
it against the public interest or the protection of investors to grant 
the exemption from section 9(a).
    4. Applicants state that the alleged Conduct giving rise to the 
Injunction did not in any way involve any of the Fund Servicing 
Applicants acting in their capacity as investment adviser, sub-adviser 
or principal underwriter for the Funds. Applicants also state that the 
Conduct did not involve any Fund or Fund assets with respect to which 
Fund Servicing Applicants engaged in Fund Services Activities. In 
addition, Applicants state that none of the Funds to which Fund 
Servicing Applicants provide Fund Services Activities purchased, held, 
or hold securities issued in the 2010 Puda Coal stock offering.
    5. Applicants state that: (i) None of the current or former 
directors, officers or employees of the Fund Servicing Applicants had 
any involvement in the Conduct and (ii) the personnel who were involved 
in the Conduct have had

[[Page 39476]]

no, and will not have any, involvement in providing Fund Services 
Activities and will not serve as an officer, director, or employee of 
any Covered Person providing Fund Services Activities. Applicants 
assert that because the personnel of the Fund Servicing Applicants did 
not have any involvement in the Conduct, shareholders of Funds that 
received investment advisory, depository and principal underwriting 
services from the Fund Servicing Applicants were not affected any 
differently than if those Funds had received services from any other 
non-affiliated investment adviser, depositor or principal underwriter.
    6. Applicants submit that section 9(a) should not operate to bar 
them from serving the Funds and their shareholders in the absence of 
improper practices relating to their Fund Services Activities. 
Applicants state that the section 9(a) disqualification could result in 
substantial costs to the Funds to which the Fund Servicing Applicants 
provide investment advisory services, and such Funds' operations would 
be disrupted, as they sought to engage new advisers or sub-advisers. 
Applicants assert that these effects would be unduly severe given the 
Fund Servicing Applicants' lack of involvement in the Conduct. 
Moreover, Applicants state that Macquarie Capital has taken remedial 
actions to address the Conduct, including reviewing its due diligence 
policies and procedures with the assistance of a number of different 
outside law firms, as outlined in the application. Thus, Applicants 
believe that granting the exemption from section 9(a), as requested, 
would be consistent with the public interest and the protection of 
investors.
    7. Applicants state that the inability of the Fund Servicing 
Applicants to continue to provide investment advisory services to Funds 
would result in those Funds and their shareholders facing unduly and 
disproportionately severe hardships. Applicants assert that imposing 
the section 9(a) disqualifications upon the Adviser Applicants would 
deprive the shareholders of certain Funds of the advisory or sub-
advisory services that they expected to receive when they decided to 
invest in the Funds. Applicants state that many shareholders have long-
standing investments and relationships with the Funds. Applicants 
represent that each Adviser Applicant has developed a familiarity and 
expertise with a particular Fund's operations, and that replacing the 
Adviser Applicants with another adviser would result in inefficiencies 
and potential investment losses during a transition period. Applicants 
assert that disqualification from providing these services would 
disrupt investment strategies and could potentially result in large net 
redemptions of shares of the Funds, which in turn could both frustrate 
efforts to effectively manage the Funds' assets and increase the Funds' 
expense ratios to the detriment of non-redeeming shareholders. 
Applicants also note that any effort to find suitable replacement 
investment advisers and/or sub-advisers would necessarily take time, 
during which the Funds would lack advisory services, and that the cost 
to the Funds of obtaining shareholder approval for the new investment 
advisory or sub-advisory services would be substantial. Applicants 
further assert that the disqualification of Delaware Distributors would 
cause the Funds to expend time and resources to find and engage 
substitute principal underwriters, and that the substitute underwriters 
would not be able to replicate the selling network established by 
Delaware Distributors.
    8. Applicants also represent that the boards of directors or 
trustees (the ``Boards'') of those Funds for which a Fund Servicing 
Applicant serves as the primary adviser or principal underwriter have 
been apprised of the consequences to the relevant Fund Servicing 
Applicants as a result of the issuance of the Injunction, and that such 
Boards have requested that the relevant Fund Servicing Applicants 
continue to provide services to their Funds. Applicants further state 
that for those Funds for which a Fund Servicing Applicant serves as a 
sub-adviser, Applicants have provided the primary investment advisers 
with written materials describing the Conduct, the Injunction, the 
disqualification under section 9(a) of the Act, and the process for 
obtaining exemptive relief under section 9(c) of the Act, and that none 
of the sub-advised Funds or their primary advisers has requested that 
the Fund Servicing Applicants cease providing sub-advisory services.
    9. Applicants state that, once a Permanent Order is issued, the 
Fund Servicing Applicants will, as soon as reasonably practicable, 
distribute additional written materials with updated information to the 
Boards of the Funds. The written materials will include an offer to 
meet in person with the Boards, including the directors who are not 
``interested persons'' of such Funds as defined in section 2(a)(19) of 
the Act and their independent legal counsel as defined in rule 0-
1(a)(6) under the Act.
    10. Applicants represent that they have undertaken to develop 
procedures reasonably designed to prevent violations of section 9(a) by 
Fund Servicing Applicants and their affiliated persons. Applicants 
state that as part of this process their legal and compliance groups 
have issued a firm-wide communication establishing a procedure whereby 
the legal and compliance personnel in each of MGL's business groups 
globally must identify and escalate potential cross-divisional and 
cross-jurisdictional impacts from a regulatory enforcement matter or 
litigation, including disqualifying events under applicable securities 
laws and regulations, to central legal and compliance management, which 
will further assess the event to determine, among other things, whether 
there exists any disqualification events under federal securities laws.
    11. Applicants represent that they will engage an independent 
consultant (``Independent Consultant'') to review and test the existing 
procedures relating to compliance with section 9(a) and to recommend 
appropriate enhancements to ensure that the procedures are reasonably 
designed to prevent violations of section 9(a) by Covered Persons. 
Applicants state that, as part of this process, the Independent 
Consultant specifically will consider enhancements to the procedures to 
provide for the escalation of information regarding potential 
disqualifying events under section 9(a) so that the information may be 
appropriately analyzed in a timely manner. Applicants further represent 
that, based on the recommendations of the Independent Consultant, 
Applicants will implement, within 60 days of the date of the Permanent 
Order, enhancements to the procedures that are reasonably designed to 
prevent violations of section 9(a) by Covered Persons. Applicants state 
that, in the case of Covered Persons that are registered investment 
advisers, such procedures will be part of their written policies and 
procedures adopted and implemented pursuant to rule 206(4)-7 under the 
Advisers Act. In addition, Applicants state that, in the case of 
Delaware Distributors or any other Covered Person that serves as a 
principal underwriter to a registered investment company in the future, 
such procedures will be part of their Written Supervisory Procedures. 
Applicants represent that the Board of each Fund that has a Covered 
Person as its primary investment adviser and/or principal underwriter 
also will review the adequacy of these procedures and the

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effectiveness of their implementation at or before the next annual 
review of the policies and procedures of the relevant primary 
investment adviser and/or principal underwriter in accordance with rule 
38a-1 under the Act. Applicants further represent that, for each sub-
advised Fund, the Fund Servicing Applicants will transmit such 
procedures to each Fund's primary investment adviser for consideration 
by the relevant Board in accordance with rule 38a-1 under the Act.
    12. Applicants state that if the Fund Servicing Applicants were 
barred under section 9(a) of the Act from providing investment advisory 
services to the Funds, and were unable to obtain the requested 
exemption, the effect on their businesses and employees would be unduly 
and disproportionately severe because they have committed substantial 
capital and other resources to establishing an expertise in advising 
Funds. Applicants further state that prohibiting the Fund Servicing 
Applicants from engaging in Fund Services Activities would not only 
adversely affect their businesses, but would also adversely affect 
their employees who are involved in those activities. Applicants state 
that many of these employees working for the Fund Servicing Applicants 
could experience significant difficulties and/or delays in finding 
alternative fund-related employment.
    13. Applicants state that none of the Applicants has previously 
applied for an exemptive order under section 9(c) of the Act.

Applicants' Conditions

    Applicants agree that any order granted by the Commission pursuant 
to the application will be subject to the following conditions:
    1. As a condition to the Temporary Order, Applicants will continue 
to hold in escrow amounts equal to all advisory fees paid by the Funds 
to the Adviser Applicants for the period from April 1, 2015 through May 
15, 2015. Amounts paid into the escrow accounts will be disbursed to 
the relevant Funds and/or Adviser Applicants after the Commission has 
acted on the application for a Permanent Order and discussions with the 
relevant Funds.
    2. Any temporary exemption granted pursuant to the application 
shall be without prejudice to, and shall not limit the Commission's 
rights in any manner with respect to, any Commission investigation of, 
or administrative proceedings involving or against, Covered Persons, 
including without limitation, the consideration by the Commission of a 
permanent exemption from section 9(a) of the Act requested pursuant to 
the application or the revocation or removal of any temporary 
exemptions granted under the Act in connection with the application.
    3. Each Applicant and Covered Person will adopt and implement 
policies and procedures reasonably designed to ensure that it will 
comply with any terms and conditions of the Orders within 60 days of 
the date of the Permanent Order.
    4. Macquarie Capital will comply with the Court Order.
    5. Applicants will provide written notification to the Chief 
Counsel of the Commission's Division of Investment Management with a 
copy to the Chief Counsel of the Commission's Division of Enforcement 
of a material violation of the terms and conditions of the Orders or 
Court Order within 30 days of discovery of the material violation.

Temporary Order

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

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2015-16812 Filed 7-8-15; 8:45 am]
 BILLING CODE 8011-01-P