Document ID: SEC-2019-0346-0001
Agency: sec
Document Type: Notice
Title: Applications: Wells Fargo Securities, LLC, et al.
Posted Date: 2019-03-26T04:00Z

[Federal Register Volume 84, Number 58 (Tuesday, March 26, 2019)]
[Notices]
[Pages 11371-11375]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05686]

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

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 33404; File No. 812-15011]

Wells Fargo Securities, LLC, et al.

March 20, 2019.
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 Wells Fargo Securities, LLC 
(``WFS'') on March 20, 2019 by the U.S. District Court for the District 
of Rhode Island (``District Court''), in connection with a consent 
order between WFS 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: WFS; Wells Fargo Bank, N.A. (``WFBNA''), Galliard Capital

[[Page 11372]]

Management, Inc. (``Galliard''), Global Alternative Investment 
Services, Inc. (``GAISI''), Wells Capital Management Incorporated 
(``WCM''), Wells Fargo Asset Management (International) Limited (``WFAM 
International Limited''), Wells Fargo Asset Management (International), 
LLC (``WFAM International LLC''), Wells Fargo Funds Distributor, LLC 
(``WFFD''), Wells Fargo Funds Management, LLC (``WFFM''), and Wells 
Fargo Investment Institute, Inc. (``WFII'') (each a ``Fund Servicing 
Applicant,'' and together with WFS, the ``Applicants'').

Filing Date: The application was filed on March 20, 2019.

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 April 15, 2019 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: WFS: 550 South Tryon 
Street, 6th Floor, D1086-060, Charlotte, NC 28202; WFBNA: 101 North 
Phillips Avenue, Sioux Falls, SD 57104; Galliard: 800 LaSalle Avenue, 
Suite 1100, Minneapolis, MN 55402; GAISI and WFII: 401 South Tryon 
Street, TH 3, 5th Floor, Charlotte, NC 28202; WCM: 525 Market Street, 
10th Floor, San Francisco, CA 94105; WFAM International Limited and 
WFAM International LLC: 33 King William Street, London, England, EC4R 
9AT; WFFD and WFFM: 525 Market Street, 12th Floor, San Francisco, 
California 94105.

FOR FURTHER INFORMATION CONTACT: Jessica Shin, Attorney-Adviser or 
Trace W. Rakestraw, 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 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. WFS is an indirect wholly-owned subsidiary of Wells Fargo & 
Company (``WFC''), a registered financial holding company and bank 
holding company. WFS is a broker-dealer registered under the Securities 
Exchange Act of 1934 (``Exchange Act'') as well as a municipal 
securities broker and a municipal securities dealer subject to the 
rules of the Municipal Securities Rulemaking Board (``MSRB'').
    2. WFBNA is a national banking association that is a direct and 
indirect, wholly-owned subsidiary of WFC. A separately identifiable 
department within WFBNA, Wells Capital Management Singapore, is 
registered as an investment adviser under the Investment Advisers Act 
of 1940 (``Advisers Act''). Wells Capital Management Singapore is an 
investment adviser to certain Funds listed in Annex B of the 
Application.
    3. Galliard, WCM, WFAM International Limited, WFAM International 
LLC, WFFM, and WFII are indirect wholly-owned subsidiaries of WFC and 
each is an investment adviser registered under the Advisers Act. The 
Funds to which Galliard, WCM, WFAM, WFFM, and WFII provide investment 
advisory services are listed in Annexes A and B of the Application.
    4. GAISI and WFFD are indirect wholly-owned subsidiaries of WFC and 
are broker-dealers registered under the Exchange Act. The Funds to 
which each serves as principal underwriter are listed in Annex A and 
Annex C, respectively, of the Application.
    5. Other than the Fund Servicing Applicants, no existing company of 
which WFS is an affiliated person within the meaning of section 2(a)(3) 
of the Act currently serves as an investment adviser (as defined in 
section 2(a)(20) of the Act) or depositor of any registered investment 
company, employees' securities company or investment company that has 
elected to be treated as a business development company under the Act, 
or as principal underwriter (as defined in section 2(a)(29) of the Act) 
for any open-end registered investment company, registered unit 
investment trust (``UIT'') or registered face amount certificate 
company (``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 WFS is an affiliated person within the meaning of 
section 2(a)(3) of the Act and to any other company of which WFS 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.
---------------------------------------------------------------------------

    6. On March 7, 2016, the Commission filed a complaint (``Original 
Complaint'') and on October 28, 2016 an amended complaint (``Amended 
Complaint,'' and together with the Original Complaint, the 
``Complaint'') against WFS in the District Court alleging violations of 
sections 17(a)(2) of the Securities Act of 1933 (``Securities Act''), 
section 15B(c)(1) of the Exchange Act, and MSRB rule G-17 (the 
``Action'').\2\
---------------------------------------------------------------------------

    \2\ The Complaint also alleged that an officer and employee of 
WFS who worked on the Offering (``Individual Defendant'') aided and 
abetted the violations by WFS. The Complaint also alleged that WFS 
violated section 17(a)(3) of the Securities Act and MSRB rule G-32, 
but the Commission subsequently agreed to dismissed those claims.
---------------------------------------------------------------------------

    7. The Complaint alleged the following: WFS acted as lead placement 
agent in an offering of municipal bonds (``Offering'') by the Rhode 
Island Economic Development Corporation (``RIEDC'') in 2010. The 
proceeds of the Offering went to 38 Studios, LLC (``38 Studios''), an 
early-stage, pre-revenue videogame development company. As lead 
placement agent in the Offering, WFS knew or should have known about, 
and should have disclosed, in the private placement memorandum for the 
Offering (the ``Offering Document'') (i) 38 Studios' need for financing 
in addition to that provided by the Offering and (ii) the total 
compensation received by WFS in connection with the Offering and any 
related conflict of interest. WFS failed to include disclosure 
regarding these matters in the Offering Document (``Conduct''). As a 
result, the Offering Document was materially misleading, and WFS 
violated sections 17(a)(2) of the Securities Act, section 15B(c)(1) of 
the Exchange Act and MSRB rule G-17. Although 38 Studios attempted to 
obtain the additional financing needed following the Offering, it was 
unable to do so and defaulted on its loan payments to the RIEDC in 
2012.
    8. WFS and the Commission reached an agreement to settle the Action 
and

[[Page 11373]]

WFS has executed a ``Consent of Defendant Wells Fargo Securities, LLC'' 
(``Consent''). Pursuant to the Consent, WFS consented to the entry of a 
judgment by the District Court in the Action against WFS (``Final 
Judgment''), without admitting or denying the allegations in the 
Complaint.
    9. On March 20, 2019, the District Court entered the Final Judgment 
permanently enjoining WFS from violating section 17(a)(2) of the 
Securities Act, section 15B(c)(1) of the Exchange Act and MSRB rule G-
17 (the ``Injunction''). The Final Judgment also requires WFS to pay a 
civil monetary penalty in the amount of $812,500.\3\
---------------------------------------------------------------------------

    \3\ Id.
---------------------------------------------------------------------------

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, 
government securities broker, government 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 
WFS from acting in the capacities specified in section 9(a)(2) because 
WFS 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 the Fund Servicing Applicants under section 
9(a)(3) because each of the Fund Servicing Applicants may be considered 
to be an affiliated person within the meaning of section 2(a)(3) of the 
Act. 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 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 Servicing 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 giving rise to the Injunction 
did not involve any Fund, any Fund Servicing Applicant, or any Fund 
Servicing Activities.\4\ The Conduct relates solely to alleged material 
omissions in the offering document used in connection with one private 
placement of municipal bonds.\5\ Accordingly, Applicants assert that it 
would be unduly and disproportionately severe to allow section 9(a) to 
disqualify Covered Persons from providing Fund Servicing Activities.
---------------------------------------------------------------------------

    \4\ To the Applicants' knowledge and based on certain Fund 
Servicing Applicants' review of the Funds' contemporaneous portfolio 
holdings, the Funds did not purchase any securities in the Offering.
    \5\ The Individual Defendant is an officer and an employee of 
WFBNA, which is a Fund Servicing Applicant. Applicants, however, 
have represented that the Individual Defendant has never had, and 
does not currently have, any material involvement in WFBNA's Fund 
Servicing Activities, including at WFBNA's separately identifiable 
department registered as an investment adviser.
---------------------------------------------------------------------------

    5. Applicants maintain 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 no Fund 
Servicing Applicants were involved in the Conduct and that the Conduct 
did not involve the Funds or 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 the Fund Servicing Applicants have 
committed substantial capital and resources to establishing expertise 
in advising and sub-advising Funds and in support of their principal 
underwriting business. Prohibiting them from providing Fund Servicing 
Activities would materially adversely affect each Fund Servicing 
Applicant's business. In the case of WFFM, the effects would be 
particularly significant given that, as of September 30, 2018, the 
Funds represented almost all of the assets with

[[Page 11374]]

respect to which it provides investment advisory services. Similarly, 
in the case of WFFD, barring it from continuing to provide principal 
underwriting services to the Funds would cause it to lose a substantial 
part of its business.
    7. Applicants represent that: (1) With the exception of the 
Individual Defendant,\6\ none of the Fund Servicing Applicants' current 
or former directors, officers or employees had any involvement in the 
Conduct \7\ (2) the personnel who were involved in the Conduct (or who 
may be subsequently identified by the Applicants as having been 
involved in the Conduct) have never had, do not currently have and will 
not have any involvement in providing Fund Servicing Activities at a 
Covered Person; \8\ and (3) because the Conduct did not involve the 
performance of Fund Serving Activities and the personnel of the Fund 
Servicing Applicants involved in Fund Servicing Activities 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 in any way.
---------------------------------------------------------------------------

    \6\ See supra note 5.
    \7\ To make this representation, WFS conducted due diligence 
through its human resources department and confirmed from interviews 
with the Individual Defendant's supervisor that he has never been 
involved in Fund Servicing Activities.
    \8\ WFS has included a notation in the employment file of the 
Individual Defendant that he cannot transition into a role that 
would involve him in providing Fund Servicing Activities at any 
Covered Person. Further, each Fund Servicing Applicant has confirmed 
that its compliance policies and procedures include provisions that 
are designed to ensure that they do not become disqualified pursuant 
to Section 9(a) of the Act and to ensure compliance with the terms 
and conditions of the Orders.
---------------------------------------------------------------------------

    8. Applicants represent that the Municipal Products Group at WFS 
(``MPG'') has implemented a robust and comprehensive compliance program 
designed to ensure compliance with the rules and regulations relevant 
to WFS's activities as an underwriter and placement agent of municipal 
securities. As further detailed in the Application, since the time of 
the Offering, MPG Compliance and MPG Legal have retained outside 
counsel to assist with the development and periodic updating of a 
transactional due diligence training module for negotiated municipal 
securities underwriting transactions. All investment banking and 
underwriting syndicate personnel within the MPG must complete the 
module annually. The module educates them on the due diligence process. 
Furthermore, in late 2010, after the Conduct occurred and the Offering 
was nearly completed, MPG Compliance implemented a number of 
enhancements to MPG's compliance policies and procedures, including the 
creation and implementation of a ``Negotiated Transaction Diligence 
Form''. The Negotiated Transaction Diligence Form was designed to and 
does provide MPG personnel with a clear list of steps to take to meet 
MPG's regulatory obligations as an underwriter and placement agent of 
municipal securities. The Negotiated Transaction Diligence Form 
requires, among other things, the person completing it to identify 
actual and potential material conflicts of interest between WFS, as a 
municipal securities underwriter, and its issuer-clients. In October 
2010, the Negotiated Transaction Diligence Form was introduced to MPG's 
Public Finance Investment Banking Group (``MPG Banking Group''), which 
was involved with the Offering, for use with new transactions (i.e., 
transactions commenced after that date). The Form was not completed for 
the Offering because, by October 2010, the Offering was nearly 
completed. It was not a new transaction. WFS believes that, if the 
Negotiated Transaction Diligence Form had been implemented prior to the 
Offering, certain Conduct would have been avoided because the total 
compensation paid to WFS in connection with the Offering would likely 
have been identified on the Form as a potential conflict of interest 
between WFS and the RIEDC and considered for disclosure in the Offering 
Document. As a result of the foregoing, and additional remedial 
measures detailed in the Application, Applicants submit that granting 
the exemption as requested in the application is consistent with the 
public interest and the protection of investors.
    9. To provide further assurance that the exemptive relief being 
requested herein would be consistent with the public interest and the 
protection of the investors, the Fund Servicing Applicants agree that 
they will, as soon as reasonably practicable, distribute to the boards 
of directors of the Funds (``Boards'') written materials describing the 
circumstances that led to the Injunction, 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 
directors who are not ``interested persons'' of the Funds as defined in 
section 2(a)(19) of the Act and any ``independent legal counsel'' as 
defined in rule 0-1(a)(6) under the Act. Fund Servicing Applicants 
undertake to provide the Boards with all information concerning the 
Injunction and the Application that is necessary for the Funds to 
fulfill their disclosure and other obligations under the U.S. federal 
securities laws and will provide them with a copy of the Final Judgment 
as entered by the District Court.
    10. Certain Fund Servicing Applicants, as well as certain of their 
affiliates, have previously applied for exemptive orders under section 
9(c) of the Act, as described in greater detail in the Application. 
Applicants, however, note that none of the previous section 9(c) orders 
granted to Fund Servicing Applicants related to matters pertaining to 
Fund Servicing Activities. Further, Applicants state that the facts and 
circumstances underlying the previously obtained section 9(c) orders do 
not form a pattern of allegedly violative conduct, including in any 
particular area, by WFS or any of the other Applicants.

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 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 each other 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. WFS will comply with the material terms and conditions of the 
Final Judgment.
    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 
within 30 days of discovery of the material violation.

Temporary Order

    The Commission has considered the matter and finds that Applicants 
have

[[Page 11375]]

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,
Deputy Secretary.
[FR Doc. 2019-05686 Filed 3-25-19; 8:45 am]
 BILLING CODE 8011-01-P