83 FR 23005 - BlackRock Advisors, LLC, et al.

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 96 (May 17, 2018)

[Federal Register Volume 83, Number 96 (Thursday, May 17, 2018)]
[Notices]
[Pages 23005-23007]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-10499]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Advisers Act Release No. 4912; 803-00240]


BlackRock Advisors, LLC, et al.

May 11, 2018.
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).

APPLICANTS: BlackRock Advisors, LLC, BlackRock Financial Management, 
Inc. and BlackRock Fund Advisors (Collectively the ``Applicants'' or 
``Advisers'').

RELEVANT SECTIONS OF THE ACT: Exemption requested under section 206A of 
the Act and rule 206(4)-5(e) from rule 206(4)-5(a)(1) under the Act.

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

FILING DATES: The application was filed on May 26, 2017, and amended 
and restated applications were filed on November 21, 2017 and March 28, 
2018.

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 June 5, 2018, 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 may request notification of a hearing 
by writing to the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street 
NE, Washington, DC 20549-1090. Applicants: BlackRock Advisors, LLC and 
BlackRock Financial Management, Inc., 55 East 52nd Street, New York, NY 
10055 and BlackRock Fund Advisors, 400 Howard Street, San Francisco, CA 
94105.

FOR FURTHER INFORMATION CONTACT: Rachel Loko, Senior Counsel, 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. Applicants are registered with the Commission as investment 
advisers pursuant to the Act. BlackRock, Inc. (``BlackRock'') is the 
parent company of the Advisers. Applicants act as advisers to 
registered investment companies and investment companies exempt from 
registration under the Investment Company Act of 1940.
    2. The individual who made the campaign contribution that triggered 
the two-year compensation ban (the ``Contribution'') is Mark Wiedman 
(the ``Contributor''). The Contributor is a Senior Managing Director at 
BlackRock, the head of BlackRock's ETF and Index Investments business, 
and a member of BlackRock's Global Executive Committee. BlackRock's ETF 
business focuses on selling interests in RICs directly to investors, 
including certain government entities, which is not covered business 
under rule 206(4)-5. However, Applicants submit that, as a member of 
BlackRock's Global Executive Committee, the Contributor is, and at the 
time of the Contribution was, an executive officer of the Advisers 
under rule 206(4)-5(f)(4), and thus by definition is and at all 
relevant times was a covered associate pursuant to rule 206(4)-
5(f)(2)(i).
    3. Certain Ohio government entities have selected mutual funds 
(``RICs'') advised by BlackRock Advisors, LLC and BlackRock Fund 
Advisors to be options in their participant-directed plans and one Ohio 
government pension plan has invested in an unregistered fund managed by 
BlackRock Financial Management, Inc. Such government entities, are 
``government entities'' as defined under Rule 206(4)-5(f)(5) and, 
throughout the application, are referred to individually as a 
``Client'' and collectively as the ``Clients.''
    4. The recipient of the Contribution was John Kasich (the 
``Official''), the Governor of Ohio, in his campaign for President of 
the United States. The investment decisions of each Client are overseen 
by a board of trustees or directors (the ``Board'' or the ``Boards''), 
to which the Governor appoints certain members. The Applicants submit 
that due to the power of appointment, the Governor is an ``official'' 
of each Client under rule 206(4)-5.
    5. The Contribution that triggered rule 206(4)-5's prohibition on 
compensation under rule 206(4)-5(a)(1) was made on January 15, 2016 
(``the Contribution Date'') for the amount of $2,700 to the Official's 
campaign for President of the United States via credit card to attend a 
lunch hosted by the campaign at the invitation of a business 
acquaintance who was an independent director of a BlackRock fund and 
who shared the Contributor's personal political views. Applicants 
submit that the Contribution was not motivated by any desire to 
influence the award of investment advisory business. Applicants 
represent that in addition to being entitled to vote in the 
presidential election, the Contributor was interested in the GOP 
presidential primary. Aside from a brief introduction while Governor 
Kasich welcomed a group of attendees at lunch, the Contributor has 
never met the Official or dealt with the Official or his staff in any 
capacity. Moreover, the

[[Page 23006]]

Contribution is consistent with other contributions made by the 
Contributor over the years. Applicants state that the Contributor made 
the Contribution without pre-clearance from BlackRock's Legal 
department. Applicants also represent that at the time he attended the 
campaign lunch where he made the Contribution, the Contributor was 
focused on the Official in his capacity as a candidate for President of 
the United States, and the potential that a contribution to such a 
federal candidate would be covered under rule 206(4)-5 simply did not 
occur to him in that frame of mind. The Contributor never told any 
prospective or existing investor (including the Clients) about the 
Contribution, and did not discuss the Contribution with BlackRock, the 
Advisers or any of their covered associates.
    6. The initial selection process pursuant to which each Client 
decided to invest in a fund advised by an Adviser or to select a RIC 
advised by an Adviser as an investment option in a participant-directed 
plan, as applicable, had been completed before the contribution was 
made. Applicants state that the Contributor had no 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 
with respect to those investments. The Contributor did not participate 
in any capacity in soliciting those investments or any other investment 
advisory business covered under rule 206(4)-5 from any government 
entity.
    7. The Contribution was discovered on October 6, 2016 by 
Blackrock's Compliance department in the course of internal compliance 
testing. Specifically, Blackrock discovered the Contribution after a 
routine search on the Federal Election Commission's website. The 
Contributor requested a refund of the full $2,700 on November 11, 2016 
and received a refund on November 23, 2016. Applicants represent that 
all compensation earned that is attributable to the Clients' 
investments since the Contribution Date has been placed in escrow 
pending the outcome of this Application.
    8. BlackRock's political contribution policies and procedures (the 
``Policy'') which apply to BlackRock as well as its subsidiaries, 
including the Advisers, were adopted and implemented in order to 
coincide with the effective date of rule 206(4)-5, well before the 
Contribution was made. The Applicants submit that at the time of the 
Contribution, the Policy required, and continues to require, that all 
employees pre-clear all political contributions made in the United 
States. There is no de minimis exception from the pre-clearance 
requirement. Under the existing Policy, BlackRock requires employees to 
certify annually to their compliance with the Policy, sends reminders 
about the Policy and its pre-clearance requirement twice every year, 
and requires all employees to complete an annual computer-based 
training module that addresses the Policy and its pre-clearance 
requirement. In addition, BlackRock periodically conducts searches of 
public websites for contributions made by employees.

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. 
Each of the Clients 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; 
and (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 Clients 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. Applicants contend 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 any Client's merit-based 
process for the selection or retention of advisory services, the 
Clients' interests are best served by allowing the Advisers and their 
Clients to continue their relationship uninterrupted. Applicants state 
that causing the Advisers to forgo the impacted compensation 
attributable to the two-year period would result in a financial loss of 
approximately $37 million or 13,700 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 published 
well before the Contribution was made. Applicants further represent 
that, the Policy has conformed to the requirements of rule

[[Page 23007]]

206(4)-5 and has been more rigorous than rule 206(4)-5's requirements 
as BlackRock has monitored compliance with the Policy by searching for 
an individual employee's past political contributions on the Federal 
Election Commission's database whenever an individual makes a request 
to BlackRock to pre-clear a contribution to a federal candidate. 
Applicants submit that BlackRock is in the process of enhancing this 
monitoring protocol.
    8. Applicants assert that at no time did any employee or covered 
associate of BlackRock, the Advisers or any of their affiliates, other 
than the Contributor have any knowledge that the Contribution had been 
made before its discovery by the Compliance department in October 2016.
    9. Applicants assert that after learning of the Contribution and 
confirming the Contributor's covered status, BlackRock caused the 
Contributor to promptly obtain a full refund of the Contribution. 
Applicants submit that in response to the contribution, BlackRock has 
begun the process of implementing enhancements to the Policy that will 
include (a) sending its employees, including employees of its 
affiliates a third annual reminder to pre-clear all political 
contributions in the United States, including those to federal 
candidates (b) revising its annual computer-based training module to 
highlight the need to pre-clear all political contributions in the 
United States, including those to federal candidates, and (c) enhancing 
its protocol to monitor compliance with the Policy's pre-clearance 
requirements by searching the FEC's and certain states' campaign 
finance databases for contributions made by a sampling of covered 
associates on a quarterly basis. Finally, BlackRock's Compliance 
department will remind the Contributor of the Policy's pre-clearance 
requirement on at least a quarterly basis.
    10. Applicants state that the Contributor is and has, at all 
relevant times, been a covered associate of the Advisers. Applicants 
note that the Contributor has never solicited investment advisory 
business covered under rule 206(4)-5 from government entities and has 
had no direct contact or involvement with any of the Clients or the 
members of their Boards regarding any business matters.
    11. Applicants assert that the Clients' initial investments with 
the Advisers substantially predate the Contribution. They were done on 
an arm's length basis and the Contributor and the Applicants took no 
action to obtain any direct or indirect influence from the Official.
    12. Applicants submit that neither the Advisers nor the Contributor 
sought to interfere with the Clients' 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 disproportionate to the mistake that 
was made.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-10499 Filed 5-16-18; 8:45 am]
BILLING CODE 8011-01-P