Document ID: SEC-2023-0216-0001
Agency: sec
Document Type: Notice
Title: Application: J.P. Morgan Investment Management, Inc.
Posted Date: 2023-02-23T05:00Z

[Federal Register Volume 88, Number 36 (Thursday, February 23, 2023)]
[Notices]
[Pages 11493-11496]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-03675]

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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.

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    Notice of application for an exemptive order under Section 206A of 
the Investment Advisers Act of 1940 (the ``Act'') and rule 206(4)-5(e) 
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 
[email protected] 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: [email protected]. Applicant: J.P. 
Morgan Investment Management Inc. [email protected].com, 
[email protected], [email protected].

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 http://www.sec.gov/rules/iareleases.shtml 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