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 Range		32926-32929
FR Document		2018-15078

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]

-----------------------------------------------------------------------

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'').

-----------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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

32926 Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices

Agreement’’).1 An Adviser will provide Series to disclose (as both a dollar SECURITIES AND EXCHANGE
each Subadvised Series with continuous amount and a percentage of the COMMISSION
investment management services, Subadvised Series’ net assets): (a) The
subject to the supervision of, and aggregate fees paid to the Adviser and [Investment Company Act Release No.
policies established by, the board of any Wholly-Owned Sub-Adviser; (b) the 33157; File No. 812–14926]
trustees of each Trust (each, a ‘‘Board’’). aggregate fees paid to Non-Affiliated
Each Investment Management Charles Schwab & Co. Inc. and Charles
Sub-Advisers; and (c) the fee paid to
Agreement permits the Adviser, subject Schwab Investment Management, Inc.
each Affiliated Sub-Adviser
to the approval of the applicable Board, (collectively, ‘‘Aggregate Fee July 10, 2018.
to delegate to one or more sub-advisers
Disclosure’’). AGENCY: Securities and Exchange
(each, a ‘‘Sub-Adviser’’ and collectively,
the ‘‘Sub-Advisers’’) the responsibility 3. Applicants agree that any order Commission (‘‘Commission’’).
to provide the day-to-day portfolio granting the requested relief will be ACTION: Temporary order and notice of
investment management of each subject to the terms and conditions application for a permanent order under
Subadvised Series, subject to the stated in the application. Such terms section 9(c) of the Investment Company
supervision and direction of the and conditions provide for, among other Act of 1940 (‘‘Act’’).
Adviser.2 The primary responsibility for safeguards, appropriate disclosure to
managing each Subadvised Series will SUMMARY OF APPLICATION: Applicants
Subadvised Series shareholders and
remain vested in the Adviser. The have received a temporary order
notification about sub-advisory changes (‘‘Temporary Order’’) exempting them
Adviser will hire, evaluate, allocate and enhanced Board oversight to protect
assets to and oversee the Sub-Advisers, from section 9(a) of the Act, with
the interests of the Subadvised Series’ respect to an injunction entered against
including determining whether a Sub- shareholders.
Adviser should be terminated, at all Charles Schwab & Co. Inc. (‘‘CS&Co.’’)
times subject to the authority of the 4. Section 6(c) of the Act provides that on July 9, 2018 by the U.S. District
applicable Board. the Commission may exempt any Court for the Northern District of
2. Applicants request an exemption to person, security, or transaction or any California (‘‘District Court’’), in
permit the Adviser, subject to Board class or classes of persons, securities, or connection with a consent order
approval, to hire certain Sub-Advisers transactions from any provisions of the between CS&Co. and the Commission,
pursuant to Sub-Advisory Agreements Act, or any rule thereunder, if such until the Commission takes final action
and materially amend existing Sub- relief is necessary or appropriate in the on an application for a permanent order
Advisory Agreements without obtaining public interest and consistent with the (the ‘‘Permanent Order,’’ and with the
the shareholder approval required under protection of investors and purposes Temporary Order, the ‘‘Orders’’).
section 15(a) of the Act and rule 18f–2 fairly intended by the policy and Applicants also have applied for a
under the Act.3 Applicants also seek an provisions of the Act. Applicants Permanent Order.
exemption from the Disclosure believe that the requested relief meets APPLICANTS: CS&Co. and Charles
Requirements to permit a Subadvised this standard because, as further Schwab Investment Management, Inc.
explained in the application, the (‘‘CSIM’’) (each an ‘‘Applicant’’ and
1 Applicants request relief with respect to the
Investment Management Agreements together, the ‘‘Applicants’’).
named Applicants, as well as to any future series
will remain subject to shareholder FILING DATE: The application was filed
of the Trusts and any other registered open-end
management investment company or series thereof approval while the role of the Sub- on July 2, 2018.
that: (a) Is advised by the Initial Adviser, its Advisers is substantially similar to that HEARING OR NOTIFICATION OF HEARING:
successors, or any entity controlling, controlled by
or under common control with the Initial Adviser of individual portfolio managers, so that An order granting the application will
or its successors (each, an ‘‘Adviser’’); (b) uses the requiring shareholder approval of Sub- be issued unless the Commission orders
multi-manager structure described in the Advisory Agreements would impose a hearing. Interested persons may
application; and (c) complies with the terms and request a hearing by writing to the
conditions set forth in the application (each, a unnecessary delays and expenses on the
‘‘Subadvised Series’’). For purposes of the requested Subadvised Series. Commission’s Secretary and serving
order, ‘‘successor’’ is limited to an entity that Applicants with a copy of the request,
results from a reorganization into another
Applicants believe that the requested personally or by mail. Hearing requests
jurisdiction or a change in the type of business relief from the Disclosure Requirements should be received by the Commission
organization. meets this standard because it will by 5:30 p.m. on August 6, 2018 and
2 A ‘‘Sub-Adviser’’ for a Subadvised Series is (1)
improve the Adviser’s ability to should be accompanied by proof of
an indirect or direct ‘‘wholly-owned subsidiary’’ (as
such term is defined in the Act) of the Adviser for negotiate fees paid to the Sub-Advisers service on Applicants, in the form of an
that Subadvised Series, or (2) a sister company of that are more advantageous for the affidavit, or for lawyers, a certificate of
the Adviser for that Subadvised Series that is an Subadvised Series. service. Pursuant to rule 0–5 under the
indirect or direct ‘‘wholly-owned subsidiary’’ of the
same company that, indirectly or directly, wholly For the Commission, by the Division of Act, hearing requests should state the
owns the Adviser (each of (1) and (2) a ‘‘Wholly- Investment Management, under delegated nature of the writer’s interest, any facts
Owned Sub-Adviser’’ and collectively, the authority. bearing upon the desirability of a
‘‘Wholly-Owned Sub-Advisers’’), or (3) not an hearing on the matter, the reason for the
‘‘affiliated person’’ (as such term is defined in Eduardo A. Aleman,
section 2(a)(3) of the Act) of the Subadvised Series request, and the issues contested.
Assistant Secretary.
or the Adviser, except to the extent that an Persons who wish to be notified of a
[FR Doc. 2018–15068 Filed 7–13–18; 8:45 am]
affiliation arises solely because the Sub-Adviser hearing may request notification by
sradovich on DSK3GMQ082PROD with NOTICES

serves as a sub-adviser to a Subadvised Series BILLING CODE 8011–01–P writing to the Commission’s Secretary.
(‘‘Non-Affiliated Sub-Advisers’’).
3 The requested relief will not extend to any sub- ADDRESSES: Secretary, U.S. Securities
adviser, other than a Wholly-Owned Sub-Adviser, and Exchange Commission, 100 F Street
who is an affiliated person, as defined in Section NE, Washington, DC 20549–1090;
2(a)(3) of the Act, of the Subadvised Series, any
Trust or of the Adviser, other than by reason of
Applicants: Charles Schwab & Co. Inc.:
serving as a sub-adviser to one or more of the 211 Main Street, San Francisco, CA
Subadvised Series (‘‘Affiliated Sub-Adviser’’). 94105; Charles Schwab Investment

VerDate Sep<11>2014 17:31 Jul 13, 2018 Jkt 244001 PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 E:\FR\FM\16JYN1.SGM 16JYN1

Document Created: 2018-07-14 00:53:28
Document Modified: 2018-07-14 00:53:28

Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
Action		Temporary order and notice of application for a permanent order under section 9(c) of the Investment Company Act of 1940 (``Act'').
Dates		The application was filed on July 2, 2018.
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).
FR Citation		83 FR 32926