83 FR 32926 - Charles Schwab & Co. Inc. and Charles Schwab Investment Management, Inc.

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 136 (July 16, 2018)

Page Range32926-32929
FR Document2018-15078

Federal Register, Volume 83 Issue 136 (Monday, July 16, 2018)
[Federal Register Volume 83, Number 136 (Monday, July 16, 2018)]
[Notices]
[Pages 32926-32929]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-15078]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 33157; File No. 812-14926]


Charles Schwab & Co. Inc. and Charles Schwab Investment 
Management, Inc.

July 10, 2018.
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 Charles Schwab & Co. Inc. 
(``CS&Co.'') on July 9, 2018 by the U.S. District Court for the 
Northern District of California (``District Court''), in connection 
with a consent order between CS&Co. and the Commission, 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:  CS&Co. and Charles Schwab Investment Management, Inc. 
(``CSIM'') (each an ``Applicant'' and together, the ``Applicants'').

Filing Date:  The application was filed on July 2, 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 August 6, 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 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: Charles Schwab & Co. 
Inc.: 211 Main Street, San Francisco, CA 94105; Charles Schwab 
Investment

[[Page 32927]]

Management, Inc.: 211 Main Street, San Francisco, CA 94105.

FOR FURTHER INFORMATION CONTACT: Thankam A. Varghese, Attorney-Adviser, 
Kyle R. Ahlgren, Senior Counsel, or Holly L. Hunter-Ceci, Assistant 
Chief Counsel, 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 website 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. CS&Co. is a California corporation registered as a broker-dealer 
under the Securities Exchange Act of 1934, as amended (``Exchange 
Act''), and as an investment adviser under the Investment Advisers Act 
of 1940, as amended (the ``Advisers Act''). CS&Co. serves as the 
principal underwriter for 85 open-end management investment companies 
registered under the Act (``Open-End Funds''). CSIM is a Delaware 
corporation registered as an investment adviser under the Advisers Act 
that serves as investment adviser to 107 Open-End Funds. A list of the 
funds to which CS&Co. and CSIM served as investment adviser or 
principal underwriter, individual adviser or sub-adviser as of June 1, 
2018 (the ``Funds'') is appended to the Application.
    2. CS&Co. and CSIM are wholly-owned subsidiaries of The Charles 
Schwab Corporation (``CS''), a Delaware corporation headquartered in 
San Francisco, California and listed on the New York Stock Exchange. CS 
is a savings and loan holding company incorporated in 1986 that engages 
through its subsidiaries in wealth management, securities brokerage, 
banking, asset management, custody, and financial advisory services.
    3. While no existing company of which CS&Co. is an ``affiliated 
person'' within the meaning of section 2(a)(3) of the Act (``Affiliated 
Person''), other than CS&Co. and CSIM (the ``Fund Servicing 
Applicants'') currently serves as an investment adviser (as defined in 
section 2(a)(20) of the Act) to, or depositor of, any registered 
investment company under the Act, employees' securities company or 
investment company that has elected to be treated as a business 
development company under the Act, or as a principal underwriter (as 
defined in section 2(a)(29) of the Act) for any Open-End Fund, unit 
investment trust registered under the Act (``UIT''), or face-amount 
certificate company registered under the Act (``FACC'') (such 
activities, the ``Fund Servicing Activities''), Applicants request that 
any relief granted by the Commission pursuant to the application also 
apply to any existing company of which CS&Co. is an Affiliated Person 
and to any other company of which CS&Co. may become an Affiliated 
Person in the future (together with the Fund Servicing Applicants, the 
``Covered Persons'') with respect to any activity contemplated by 
section 9(a) of the Act.\1\
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    \1\ The Fund Servicing Applicants and other Covered Persons may, 
if the Orders are 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.
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    4. On July 2, 2018, the Commission filed a complaint in the 
District Court (the ``Complaint'') alleging violations of section 17(a) 
of the Exchange Act and rule 17a-8 thereunder. CS&Co. agreed to consent 
to the entry of a judgment by the District Court against CS&Co. (the 
``Final Judgment''). The Complaint alleges that, in violation of 
section 17(a) of the Exchange Act and rule 17a-8 thereunder, CS&Co. 
failed to file Suspicious Activity Reports (``SARs'') on suspicious 
transactions by independent advisers that CS&Co. terminated from its 
custodial platform (``Advisers''). Such Advisers were not affiliated or 
associated with CS&Co. CS&Co. terminated the Advisers for engaging in 
activity CS&Co. determined violated its internal policies and presented 
risk to CS&Co. or its customers. The Complaint alleges that: (1) 
CS&Co.'s failure to file SARs during the 2012-2013 time period resulted 
from its inconsistent implementation of policies and procedures for 
identifying reportable transactions under the SAR rule (31 CFR 
1023.320(a)) when CS&Co. investigated and terminated Advisers from its 
custodial platform; (2) although CS&Co. took steps to investigate and 
terminate Advisers, CS&Co. did not have clear or consistent policies 
for the types of activities for which SARs need to be filed; and (3) in 
a number of cases in which Advisers were terminated and there was 
reason for CS&Co. to suspect fraudulent activity, CS&Co. applied an 
unreasonably high standard for determining whether to file a SAR on the 
suspicious transactions.
    5. Concurrently with the filing of the Complaint, CS&Co. presented 
to the District Court an executed Consent of the Defendant Charles 
Schwab & Co. Inc. to Entry of Final Judgment (the ``Consent''), 
consenting to the Final Judgment. The Final Judgment permanently 
restrains and enjoins CS&Co from violating section 17(a) of the 
Exchange Act and rule 17a-8 thereunder (the ``Injunction'') and ordered 
CS&Co. to pay a civil penalty in the amount of $2,800,000.

Applicants' Legal Analysis

    1. Section 9(a)(2) of the Act provides, in pertinent part, that a 
person may not serve or act as, among other things, an investment 
adviser or depositor of any registered investment company or as 
principal underwriter for any registered open-end investment company, 
UIT, or FACC, if such person ``. . . by reason of any misconduct, is 
permanently or temporarily enjoined by order, judgment, or decree of 
any court of competent jurisdiction from acting as an underwriter, 
broker, dealer, investment adviser, municipal securities dealer, bank, 
transfer agent, credit rating agency or entity or person required to be 
registered under the Commodity Exchange Act, or as an affiliated 
person, salesman, or employee of any investment company, bank, 
insurance company, or entity or person required to be registered under 
the Commodity Exchange Act, or from engaging in or continuing any 
conduct or practice in connection with any such activity or in 
connection with the purchase or sale of any security.'' Section 9(a)(3) 
of the Act makes the prohibitions of 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. The Injunction would result in a disqualification of 
CS&Co. from acting in the capacities specified in section 9(a)(2) 
because CS&Co. would be permanently enjoined by the District Court from 
engaging in or continuing certain conduct and/or practices in 
connection with the offer or sale of any security. The Injunction would 
also result in the disqualification of CSIM under section 9(a)(3) 
because CS&Co. is an Affiliated Person of CSIM within the meaning of 
section 2(a)(3) of the Act and would be subject to an injunction 
described in section 9(a)(2). Other Covered Persons similarly would be 
disqualified pursuant to section 9(a)(3) were they to act in any of the 
capacities listed in section 9(a).
    2. Section 9(c) of the Act provides that, upon application, the 
Commission shall by order grant an exemption from the disqualification 
provisions of

[[Page 32928]]

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: (1) The prohibitions of section 9(a), as applied to 
the person, are unduly or disproportionately severe; or (2) 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. 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.
    3. Applicants believe they meet the standards for exemption 
specified in section 9(c). Applicants assert that: (i) The scope of the 
misconduct was limited and did not involve any of the Fund Servicing 
Applicants performing Fund Service Activities, or any Fund with respect 
to which the Fund Servicing Applicants engaged in Fund Servicing 
Activities or their respective assets; (ii) application of the 
statutory bar would result in material economic losses, and the 
operations of the Funds would be disrupted as they sought to engage new 
underwriters, advisers and/or sub-advisers, as the case may be; (iii) 
the prohibitions of section 9(a), if applied to the Fund Servicing 
Applicants and other Covered Persons, would be unduly or 
disproportionately severe; and (iv) the Conduct did not constitute 
conduct that would make it against the public interest or protection of 
investors to grant the exemption from section 9(a).
    4. Applicants assert that the Conduct did not implicate any Fund 
Servicing Activities and did not involve any Fund or the assets of any 
Fund with respect to which any Applicants provide Fund Servicing 
Activities. Applicants further note that none of the CS&Co. employees 
who were directly responsible for determining whether a SAR filing was 
required for the Advisers had any involvement in Fund Servicing 
Activities, and that no such person remains in the employ of any of the 
Fund Servicing Applicants.
    5. Applicants assert that neither the protection of investors nor 
the public interest would be served by permitting the section 9(a) 
disqualifications to apply to the Fund Servicing Applicants because 
those disqualifications would deprive the Funds of the advisory or sub-
advisory and underwriting services that shareholders expected the Funds 
would receive when they decided to invest in the Funds. Applicants also 
assert that the prohibitions of section 9(a) could operate to the 
financial detriment of the Funds and their shareholders, which would be 
an unduly and disproportionately severe consequence given that the 
Conduct did not implicate any of the Fund Servicing Activities. 
Applicants further assert that the inability of the Fund Servicing 
Applicants to continue providing investment advisory and underwriting 
services to Funds would result in the Funds and their shareholders 
facing other potential hardships, as described in the application.
    6. Applicants assert that if the Fund Servicing Applicants were 
barred under section 9(a) from providing investment advisory and 
underwriting services to the Funds and were unable to obtain the 
requested exemption, the effect on their businesses and employees would 
be severe. Applicants represent that CS&Co. has committed capital and 
other resources to establish expertise in underwriting the securities 
of Open-End Funds and to establish distribution arrangements for Open-
End Fund shares. Applicants further represent that without relief under 
section 9(c), CS&Co. would lose the greater part of its business, 
potentially leading to sales force layoffs and placing CS&Co. at a 
competitive disadvantage to other distributors who can offer 
intermediaries a full menu of products. Applicants further represent 
CSIM has committed substantial capital and other resources to 
establishing expertise in advising Funds, and that investment advisory 
services provided to Funds represents more than 94.9% of its assets 
under management (as of March 31, 2018).
    7. Applicants represent that: (1) None of the current or former 
directors, officers or employees involved in Fund Servicing Activities 
of the Fund Servicing Applicants had any involvement in the Conduct; 
(2) none of the CS&Co. employees who were directly responsible for 
determining whether a SAR filing was required for the Advisers had any 
involvement in Fund Servicing Activities, and that no such person 
remains in the employ of any of the Fund Servicing Applicants; and (3) 
because the Conduct did not involve Fund Servicing Activities, 
shareholders of Funds were not affected any differently than if those 
Funds had received services from any other non-affiliated investment 
adviser or principal underwriter.
    8. Applicants represent that CS&Co. has taken substantial remedial 
actions to address the conduct at issue in the Complaint and Final 
Judgment. As further detailed in the Application, such remedial actions 
include improving CS&Co.'s regulatory compliance program with an 
emphasis on SAR compliance, increasing the number of employees 
dedicated to anti-money laundering and fraud prevention (including 
employees with law enforcement backgrounds), and increasing the 
quantity and quality of internal AML and SAR training.
    9. As a result of the foregoing, Applicants submit that granting 
the exemption as requested in the application is consistent with the 
public interest and the protection of investors.
    10. To provide further assurance that the exemptive relief being 
requested herein would be consistent with the public interest and the 
protection of the investors, Applicants agree that they will, as soon 
as reasonably practical following the entry of the Injunction, 
distribute to the boards of trustees of the Funds (``Boards'') written 
materials describing the circumstances that led to the Injunction, as 
well as any impact on the Funds and the application. The written 
materials will include an offer to discuss the materials at an in-
person meeting with the Boards, including the trustees who are not 
``interested persons'' of the 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. Applicants undertake to provide the Boards with 
all information concerning the Injunction and the application as 
necessary for those Funds to fulfill their disclosure and other 
obligations under the U.S. federal securities laws and will provide 
them a copy of the Final Judgment as entered by the District Court.
    11. Applicants state that none of the Applicants nor any of their 
affiliates have previously applied for orders 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. 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

[[Page 32929]]

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.
    2. Each Applicant and Covered Person will adopt and implement 
policies and procedures reasonably designed to ensure that it will 
comply with the terms and conditions of the Orders within 60 days of 
the date of the Permanent Order.
    3. CS&Co. will comply with the terms and conditions of the Consent.
    4. The 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 and 
Consent 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 
Applicants and any other Covered Persons are granted a temporary 
exemption from the provisions of section 9(a), effective as of the date 
of the Injunction, solely with respect to the Injunction, subject to 
the representations and conditions in the application, until the 
Commission takes final action on their application for a permanent 
order.

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-15078 Filed 7-13-18; 8:45 am]
 BILLING CODE 8011-01-P


Current View
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
ActionTemporary order and notice of application for a permanent order under section 9(c) of the Investment Company Act of 1940 (``Act'').
DatesThe application was filed on July 2, 2018.
ContactThankam A. Varghese, Attorney-Adviser, Kyle R. Ahlgren, Senior Counsel, or Holly L. Hunter-Ceci, Assistant Chief Counsel, at (202) 551-6821 (Division of Investment Management, Chief Counsel's Office).
FR Citation83 FR 32926 

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