J.P. Morgan Investment Management Inc.

Primary source

Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.

Published

February 23, 2023

Issuing agencies

Securities and Exchange Commission

Full Text

<html>
<head>
<title>Federal Register, Volume 88 Issue 36 (Thursday, February 23, 2023)</title>
</head>
<body><pre>
[Federal Register Volume 88, Number 36 (Thursday, February 23, 2023)]
[Notices]
[Pages 11493-11496]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-03675]

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

SECURITIES AND EXCHANGE COMMISSION

[Investment Advisers Act Release No. 6244/File No. 803-00258]

J.P. Morgan Investment Management Inc.

February 16, 2023.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice.

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

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.

Applicant: J.P. Morgan Investment Management Inc.

Summary of Application: Applicant requests that the Commission issue an
order under Section 206A of the Act and rule 206(4)-5(e) under the Act
exempting it from rule 206(4)-5(a)(1) under the Act to permit Applicant
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 an individual, who was subsequently
hired and became a covered associate of the Applicant, to an official
of the government entity.

Filing Dates: The application was filed on December 15, 2022, and
amended on December 22, 2022.

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 emailing the Commission's Secretary at
<a href="/cdn-cgi/l/email-protection#8eddebedfcebfaeffcf7fda3c1e8e8e7edebcefdebeda0e9e1f8">[email&#160;protected]</a> and serving Applicant with a copy of the
request by email. Hearing requests should be received by the Commission
by 5:30 p.m. on March 13, 2023, and should be accompanied by proof of
service on the Applicant, 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 emailing the Commission's Secretary.

ADDRESSES: The Commission: <a href="/cdn-cgi/l/email-protection#d586b0b6a7b0a1b4a7aca6f89ab3b3bcb6b095a6b0b6fbb2baa3">[email&#160;protected]</a>. Applicant: J.P.
Morgan Investment Management Inc. <a href="/cdn-cgi/l/email-protection#baf1d394f2d5d4ddfac9d1dbdededfd494d9d5d7">[email&#160;protected]</a>,
<a href="/cdn-cgi/l/email-protection#6a3e13060f18443805190f042a19010b0e0e0f0444090507">[email&#160;protected]</a>, <a href="/cdn-cgi/l/email-protection#307c55551e7b1e7d595358555c705a405d53585143551e535f5d">[email&#160;protected]</a>.

FOR FURTHER INFORMATION CONTACT: Priscilla Dao, Attorney-Adviser, at
(202) 551-5997 or Marc Mehrespand, Branch Chief, 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 <a href="http://www.sec.gov/rules/iareleases.shtml">http://www.sec.gov/rules/iareleases.shtml</a> or by
calling (202) 551-8090.

Applicant's Representations

1. Applicant is a Delaware corporation registered with the
Commission as an investment adviser under the Act. Applicant provides,
among other things, discretionary investment advisory services directly
to institutional investors and mutual funds (the ``Funds'').
2. The individual who made the campaign contribution that triggered
the compensation ban (the ``Contribution'') is Ashbel Williams (the
``Contributor'').

[[Page 11494]]

The Contributor was offered a position by the Applicant on March 18,
2022 to serve as a liaison between Applicant and certain large
investors. At the time of the Contribution, he was between jobs--having
retired from the Florida State Board of Administration in September of
2021. He was not a ``covered associate'' as defined in rule 206(4)-
5(f)(2) at the time of the Contribution. The Contributor started
employment with the Applicant on April 4, 2022, and first solicited a
government entity for investment advisory business on June 9, 2022. The
Contributor does not hold an executive officer position. However, his
role does include attending meetings with prospective investors. Since
joining the Applicant, the Contributor has, in fact, attended meetings
with and solicited representatives of certain government entities,
although none from the Recipient's jurisdiction. As such, he is a
covered associate as defined in rule 206(4)-5(f)(2)(ii).
3. A public pension plan identified as a government entity, as
defined in rule 206(4)-5(f)(5)(ii), with respect to the City of
Tallahassee (the ``Client''), has a separate account managed by the
Applicant and offers one of the Funds advised by the Applicant as an
option in a participant-directed plan.
4. The recipient of the Contribution was John Dailey (the
``Recipient''), who was the mayor of Tallahassee and running for re-
election as mayor. The investment decisions for the Client, including
the hiring of an investment adviser, are overseen by a six-member
board, on which the mayor serves in an ex-officio capacity. Due to the
Recipient's service on the Client's board, the Recipient is an
``official'' of the Client as defined in rule 206(4)-5(f)(6)(i). The
Contribution that implicated rule 206(4)-5's prohibition on
compensation under rule 206(4)-5(a)(1) was given on January 13, 2022 in
the amount of $1,000 to the Recipient's campaign for mayor. Applicant
states that a friend invited the Contributor to attend a fundraiser for
the Recipient's re-election campaign, and the Contributor contributed
in connection with that event. As a resident of Tallahassee, the
Contributor had a legitimate personal interest in the outcome of the
campaign and genuinely believed that the Recipient would promote more
favorable centrist and pro-free enterprise policies for Tallahassee.
When the Contributor attended the fundraiser discussed above, he and
the Recipient shared a conversation, but did not discuss the Client,
its relationship to the Applicant--with whom the Contributor was not
affiliated--or any other existing or prospective investors. Applicant
states that there was no discussion of the Recipient's powers,
influence or responsibilities involving the investment of city assets
or public pension funds. At the time of the Contribution, the
Contributor had no intention of soliciting investment advisory business
from the Client or any other government entity of which the Recipient
was an official. Applicant represents that the Contributor did not
solicit any other persons to make contributions to the Recipient's
campaign, and did not arrange any introductions to potential
supporters. The Contribution and attendance at the fundraiser was the
Contributor's only involvement with the Recipient's campaign. The
Contributor never informed the Client or its relationship managers at
the Applicant of the Contribution. Applicant represents that at no time
did any employees of the Applicant other than the Contributor have any
knowledge that the Contribution had been made prior to its discovery by
the Applicant in February as a result of its routine prospective
employee onboarding procedures.
5. The Client's advisory relationship with the Applicant dates back
to at least 1989, and the Client began offering a Fund managed by
Applicant as an option in a participant-directed plan in 2016, in both
cases before the Recipient was elected and began serving on the
Client's board. Applicant represents that the Contributor has never
presented for, or met with, any of the Client's representatives over
the course of the relationship. The Contributor has no role with
respect to the Client. The Contributor has had no contact with any
representative of the Client regarding investment advisory business.
6. The Contribution was discovered by the Applicant's compliance
department in February 2022 in the course of prospective employee
vetting that included review of a pre-hire political contribution
disclosure form on which the Contributor disclosed the Contribution.
The Contributor formally applied for the position with the Applicant on
February 1, 2022. Pursuant to the Applicant's pre-hire process for
applicants for covered associate positions, the Contributor then
received a form asking him to disclose past political contributions and
provided that form (on which he disclosed the Contribution) to the
Applicant on February 2. The Applicant informed the Contributor that he
would need to seek a refund, which he did by contacting the Recipient
on February 10, 2022. The Contribution was refunded by the campaign on
February 11, 2022.
7. The Applicant determined that after beginning employment and
soliciting a government entity the Contributor would become a covered
associate and trigger a ban. At the point he became a covered
associate, the Applicant ceased invoicing the Client or accepting
compensation for its separate account investment advisory services for
the period beginning on the date the Contributor became a covered
associate until two years after the date of the Contribution. The
Applicant also established a procedure to ensure that any compensation
for investment advisory services associated with the Client's
investment in a Fund for that period will be held by such Fund in a
segregated account and not distributed to the Applicant. When the
Client inquired about the status of its invoices for separate account
investment advisory services, the Applicant promptly notified Client of
the Contribution and the resulting two-year prohibition on compensation
absent exemptive relief from the Commission. The Applicant told the
Client that they would not be charged fees for the duration of the two-
year period absent exemptive relief from the Commission. The Applicant
noted that, as an alternative, the fees and compensation could be
placed in escrow pending resolution of the Applicant's exemptive
application; however, the Client expressed a preference for the
Applicant's approach.
8. The Applicant states that it also took steps to limit the
Contributor's contact with any representative of the Client for the
duration of the two-year period beginning January 13, 2022, including
informing the Contributor that he could have no contact with any
representative of the Client regarding the Applicant's investment
advisory business.
9. The Applicant's Pay-to-Play Policies and Procedures (the
``Policy'') were adopted and implemented before the Contribution was
made. The Policy was adopted even before rule 206(4)-5's proposal to
address state pay-to-play laws. Applicant represents that at all times
the Policy has been more restrictive than what was contemplated by rule
206(4)-5. All contributions to federal, state and local office
incumbents and candidates are subject to pre-clearance, not post-
contribution reporting, by employees under the Policy. There is no de
minimis exception from pre-clearance for small contributions to state
and local officials. All employees of the Applicant are subject to the
Policy and the spouse,

[[Page 11495]]

domestic partner, and dependent child of each employee are also fully
subject to the Policy. The Applicant requires that all employees
periodically certify to their compliance with the Policy. Additionally,
the Applicant conducts periodic testing (i.e., searches of federal and
state campaign finance databases) to confirm the Policy is being
followed. Prior to hiring, all prospective hires for covered associate
positions are required to disclose any political contributions within
the past two years. The Applicant's Compliance department circulates
quarterly compliance certifications that reiterate the need to pre-
clear all political contributions. The Applicant's employees also
receive regional compliance reminders about the Code of Conduct and the
Policy, and additional reminders of the need to pre-clear contributions
during election season. The Policy has been incorporated into the
firm's Code of Conduct-related trainings and its periodic reminders.

Applicant's 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 the 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 Recipient 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. Applicant requests an order pursuant to Section 206A and rule
206(4)-5(e), exempting it 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. Applicant submits 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. Applicant further submits that the other factors
set forth in rule 206(4)-5(e) similarly weigh in favor of granting an
exemption to the Applicant 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 Applicant or the Contributor
intended to, or actually did, interfere with the Client's merit-based
process for the selection or retention of advisory services, the
interests of the Client are best served by allowing the Applicant and
the Client to continue their relationship uninterrupted. Applicant
states that causing the Applicant to serve without compensation for the
remainder of the two year period could result in a financial loss that
is approximately 1,000 times the amount of the Contribution. Applicant
suggests 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. Applicant represents that, before the Contribution occurred, the
Applicant had a Policy which was fully compliant with, and more
rigorous than, rule 206(4)-5's requirements before the rule's initial
proposal by the Commission and substantially before the rule's adoption
or dates for required compliance. The Applicant also implemented a
mandatory political contribution disclosure for all prospective
employees as part of the standard corporate employment application
process, and performed compliance testing that included random searches
of campaign contribution databases for the names of employees.
Applicant states that it was this disclosure that was effective in
identifying the Contribution before the Contributor became a covered
associate.
8. Applicant asserts actual knowledge of the Contribution at the
time of its making cannot be imputed to the Applicant, given that the
Contributor was not an employee of the Applicant and had not yet
received an offer of employment with the Applicant. At no time did any
employees of the Applicant other than the Contributor have any
knowledge that the Contribution had been made prior to its discovery by
the Applicant in February 2022 as part of its standard pre-hire vetting
process.
9. Applicant asserts that after learning of the Contribution, the
Applicant and the Contributor took all available steps to obtain a
return of the Contribution. Before the Contributor was offered
employment with the Applicant, the Contributor had obtained a full
refund of the Contribution. At the point he became a covered associate,
the Applicant ceased invoicing the Client or accepting compensation for
its separate account investment advisory services for the period
beginning on the date the Contributor became a covered associate until
two years after the date of the Contribution. The Applicant also
established a procedure to ensure that any compensation for investment
advisory services associated with the Client's investment in a Fund for
that period will be held by such Fund in a segregated account and not
distributed to the Applicant. The Applicant has restricted the
Contributor from soliciting the Client and began restricting
compensation related to the Client once

[[Page 11496]]

the Contributor solicited a government entity.
10. Applicant states that the Contributor is employed to act as a
liaison between the Applicant and certain large investors in both the
public and private sector. Since joining the Applicant, the Contributor
has attended meetings with representatives of certain government
entities for the purpose of obtaining or retaining those clients.
Accordingly, the Contributor is a covered associate of the Applicant.
However, he is not an executive officer of the Applicant, as defined
under rule 206(4)-5(f)(4). After learning of the Contribution, the
Applicant took steps to limit the Contributor's contact with any
representative of the Client for the remainder of the two-year period
beginning January 13, 2022. The Applicant informed the Contributor that
he could have no contact with any representative of the Client
regarding any aspect of the Applicant's investment advisory business,
including current or prospective investments of the Client.
11. Applicant states the Client's decision to invest substantially
predates the Contributor's employment with the Applicant and the
Recipient's becoming a covered official. The Client's decisions to
invest with Applicant and/or to establish advisory relationships have
been made on an arms' length basis free from any improper influence as
a result of the Contribution. Applicant also submits that the nature of
the election and other facts and circumstances indicate that the
Contributor's apparent intent in making the Contribution was not to
influence the selection or retention of the Applicant. The Contributor
has long been involved in public policy and his community. After
leaving public service, where he had a practice of not making political
contributions, he felt free to support a candidate whom he knew through
an economic club and whose policy views were in line with his own. The
Contributor also had a legitimate interest in the outcome of the
campaign given that he lives in Tallahassee.
12. Applicant states that the Contributor's action in making a
contribution that would later trigger a ban resulted from his lack of
knowledge about rule 206(4)-5's look-back provisions and, thus, his
failure to appreciate the fact that the Contribution might impact
potential future activities for an investment advisory firm that might
employ him in the future. Applicant represents that the Contributor
never spoke with the Recipient or anyone else about the authority of
the mayor over investment decisions. The Contributor was not affiliated
with the Applicant at the time of the Contribution and, in any event,
never mentioned the Client, its relationship to the Applicant, or any
other existing or prospective investors to the Recipient. Applicant
contends that the Contributor had no intention of soliciting investment
advisory business from the Client or any other government entity of
which the Recipient was an official. The Contributor never told any
prospective or existing investor (including the Client) or any
relationship manager at the Applicant about the Contribution.
13. Applicant submits that neither the Applicant 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. Applicant further submits that there was no
violation of the Applicant's fiduciary duty to deal fairly or disclose
material conflicts given the absence of any intent or action by the
Applicant or the Contributor to influence the selection process.
Applicant contends 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.

Applicant's Conditions

The Applicant agrees 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 any business
of the Applicant with any ``government entity'' client or prospective
client for which the Recipient is an ``official'' as defined in rule
206(4)-5(f)(6), until January 13, 2024.
(2) The Contributor will receive written notification of this
condition and will provide a quarterly certification of compliance
until January 13, 2024. 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
Applicant, and be available for inspection by the staff of the
Commission.
(3) The Applicant will conduct testing reasonably designed to
prevent violations of the conditions of this 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 Applicant, and be
available for inspection by the staff of the Commission.

For the Commission, by the Division of Investment Management,
under delegated authority.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-03675 Filed 2-22-23; 8:45 am]
BILLING CODE 8011-01-P

</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>

View on FederalRegister.gov →Plain-text source

Indexed from Federal Register on February 23, 2023.

This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.