UNITED
STATES OF AMERICA
BEFORE
THE
SECURITIES
AND EXCHANGE COMMISSION
|
In
the Matter of
Investools
Inc.
13947
S. Minuteman Dr.
Amerivest
Investment Management, LLC
1005
North Ameritrade Place
TDAM
USA Inc.
161
Bay Street
35th
Floor, TD Canada Trust Tower
Toronto,
Ontario
Canada
M5J 2T2
|
INVESTMENT
COMPANY ACT OF
EXEMPTING
APPLICANTS FROM
THE
PROVISIONS OF SECTION 9(a)
|
Investools Inc. (“Investools”),
Amerivest Investment Management, LLC (“Amerivest”) and TDAM USA Inc. (“TDAM
USA”) (each an “Applicant” and, collectively, the “Applicants”),1 each hereby applies pursuant to Section 9(c)
of the Investment Company Act of 1940, as amended (the “Act”), for (i) a
temporary order granting an exemption from Section 9(a) of the Act pending the
determination of the Securities and Exchange Commission (the “Commission”) on
this application (“Application”) for permanent exemption (the “Temporary Order”)
and (ii) a permanent order exempting it from the provisions of Section 9(a) of
the Act (the “Permanent Order,” and together with the Temporary Order, the
“Orders”) in respect of the Judgment (as defined below) that has been entered
against Investools.
As set
forth below, the Applicants collectively serve as investment adviser (as defined
in Section 2(a)(20) of the Act) to over 19 funds that are series of investment
companies registered under the Act.2 While Investools does not provide, and no
existing company of which Investools is an affiliated person (other than the
Applicants) currently provides, Fund Service Activities to any registered
investment company, Applicants request that any relief granted by the Commission
pursuant to this Application also apply to any existing company of which
Investools is an affiliated person within the meaning of Section 2(a)(3) of the
Act and to any other company of which Investools may become an affiliated person
in the future (together with the Applicants, the “Covered Persons”). Applicants
request that the Temporary Order remain in effect until the Commission acts on
the Application for the Permanent Order.
Investools,
a corporation organized under the laws of Utah, provides investor education for
self-directed investors. Investools was acquired by TD AMERITRADE
Holding Corporation (“TD Ameritrade Holding”) in June 2009 as part of TD
Ameritrade Holding’s acquisition of thinkorswim Group, Inc., and is currently an
indirect, wholly-owned subsidiary of TD Ameritrade
Holding. Investools currently does not serve as investment adviser to
any registered investment company (“RIC”) or in any other capacity described in
Section 9(a) of the Act.
Amerivest,
a limited liability company organized under the laws of Delaware, is registered
as an investment adviser under the Investment Advisers Act of 1940 (the
“Advisers Act”). Amerivest provides a variety of financial planning and advisory
services to clients. Like Investools, Amerivest is an indirect, wholly-owned
subsidiary of TD Ameritrade Holding, and accordingly Amerivest may be deemed to
be under common control with Investools. Amerivest currently serves
as the sub-adviser to the Funds listed in Part 1 of Annex A, and may
become
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1
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A
list of the registered investment companies to which the Applicants serve
as investment adviser or sub-adviser as of November 19, 2009 is contained
in Annex A.
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2
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None
of the Applicants serves or acts in any of the other capacities described
in Section 9(a) of the Act. “Fund Service Activities” refers to
serving or acting in the capacity of employee, officer, director, member
of an advisory board, investment adviser, or depositor of any registered
investment company, or principal underwriter for any registered open-end
company, registered unit investment trust, or registered face-amount
certificate company. Any registered investment company to which
a Covered Person (as defined below) provides Fund Service Activities is a
“Fund.”
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adviser
to such Funds in 2010. The assets under management of the Funds for which
Amerivest provides sub-advisory services were approximately $144 million as of
July 21, 2009.
TDAM USA,
a corporation organized under the laws of Delaware, is a registered investment
adviser under the Advisers Act and a direct, wholly-owned subsidiary of The
Toronto-Dominion Bank (“TD Bank”). TDAM USA provides investment management
services to the Funds listed in Part 2 of Annex A and is a sub-adviser to the
Funds listed in Part 1 of Annex A. TDAM USA also provides discretionary
investment management services to separately managed accounts for clients in the
United States. The assets under management of the Funds for which
TDAM USA provides investment advisory services were approximately $17.8 billion
as of June 30, 2009.
As noted,
TDAM USA is a wholly-owned subsidiary of TD Bank. TD Bank owns
approximately 45% of the outstanding common stock of TD Ameritrade Holding, and
accordingly may be deemed to control TD Ameritrade Holding. Investools is an
indirect, wholly-owned subsidiary of TD Ameritrade
Holding. Accordingly, TDAM USA may be deemed to be under common
control with Investools.
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B.
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The Consent and
Injunction
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On
December 10, 2009, the Commission filed a complaint (the “Complaint”) against
Investools in the United States District Court for the District of Columbia (the
“District Court”) in a civil action captioned Securities and Exchange
Commission v. Investools Inc., Michael J. Drew and Eben D. Miller, No.
1:09-cv-02343. The Complaint alleges that Defendants Michael J. Drew (“Drew”)
and Eben D. Miller (“Miller”), who were employees of Investools in the investor
seminar industry, committed fraud during sales presentations at workshops that
Investools held throughout the United States. The Complaint alleges that
Investools failed to adequately police its sales personnel. The Complaint
alleges that Investools’ compliance policies required that speakers have actual
reasonable proof of the validity of any success claim. The Complaint alleges
that, beginning no later than 2004, Investools management learned that Drew,
Miller, and other speakers were claiming that their securities trading was
tremendously profitable. The Complaint alleges that Investools never required
Miller, Drew, or Investools’ other speakers, to provide it with documentation
substantiating their success claims, such as brokerage account statements or tax
forms. The Complaint alleges that Investools is liable as a controlling person
under Section 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”)
for violations by its speakers, including Drew and Miller, of the Exchange Act
Section 10(b) and Rule 10b-5 thereunder.
On
November 10, 2009, Investools executed a consent of Defendant
Investools (the “Consent”) in which Investools neither admits nor denies any of
the allegations in the Complaint, except as to personal and subject matter
jurisdiction (which are admitted), but consents to the entry of an injunction
(the “Injunction”) and agrees to certain other undertakings. On [●], 2009, the
District Court entered a judgment against Investools (the “Judgment”) that
restrained and enjoined Investools and Investools’ agents, servants, employees,
attorneys and all persons in active concert or participation with them who
receive actual notice by personal service or otherwise of the Judgment, from
violating, directly or indirectly, Section 10(b) of the Exchange Act, and Rule
10b-5 thereunder (15 U.S.C. Sec.78j(b); 17 C.F.R.
Sec.240.10b-5).
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II.
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Application of Section
9 of the Act
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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 investment
company registered under the Act or as a principal underwriter for any
registered open-end investment company, registered unit investment trust, or
registered face amount certificate company if the person, by reason of any
misconduct, is permanently or temporarily enjoined by order, judgment, or decree
of any court of competent jurisdiction from, among other things, “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 extends the prohibitions of Section 9(a)(2) to a company, any “affiliated
person” of which is disqualified under the provisions of Section 9(a)(2).
“Affiliated person” is defined in Section 2(a)(3) of the Act to include, among
others, any person directly or indirectly controlling, controlled by, or under
common control with, the other person.
The entry
of the Judgment results in a disqualification of Investools insofar as it is
enjoined permanently by the District Court from engaging in or continuing
particular conduct or practice in connection with the purchase or sale of any
security. Taken together, Sections 9(a)(2) and 9(a)(3) would have the effect of
precluding each Applicant from providing any Fund Service Activities to any RIC
subject to Section 9. The entry of the Judgment would result in a
disqualification of each Applicant (other than Investools) under Section 9(a)(3)
because Investools is an affiliated person of each of the other Applicants
within the meaning of Section 2(a)(3) of the Act, given that they may be deemed
to be under common control of TD Bank with Investools, and Investools would,
upon entry of the Judgment, become subject to an injunction described in Section
9(a)(2). Other Covered Persons would be similarly disqualified pursuant to
Section 9(a)(3) were they to act in any of the capacities listed in Section 9(a)
with respect to an entity subject to Section 9.
Section
9(c) of the Act provides that, upon application, the Commission shall by order
grant an exemption from the provisions of Section 9(a), either unconditionally
or on an appropriate temporary or other conditional basis, to any person if it
is established 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 protection
of investors to grant the exemption. In determining whether an exemption should
be granted under Section 9(c), the Commission historically has analyzed the
facts and circumstances of each case and has focused particularly on whether the
parties seeking relief had any involvement in, or have remedied the conduct that
serves as, the basis for disqualification under Section 9(a).3
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III.
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Statement in Support
of Application
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In
support of their position that the Commission should issue the Orders, the
Applicants assert the following.
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3
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Cf. Applications for
Relief from Disqualification, Investment Company Act Release No. 8689
(Feb. 26, 1975).
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A.
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The Limited Scope of
the Alleged Misconduct
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The
alleged conduct giving rise to the Injunction did not involve any of the
Applicants providing Fund Service Activities to any RIC. The alleged conduct
giving rise to the Injunction similarly did not involve any RIC with respect to
which Investools engaged in Fund Service Activities. Additionally, the alleged
conduct giving rise to the Injunction occurred before the acquisition of
thinkorswim Group Inc., the parent of Investools, by TD Ameritrade Holding when
the Applicants, other than Investools, were not affiliated persons of
Investools.
The
legislative history of Section 9 indicates that the purpose of the Section “was
to get rid of persons with criminal records, persons who were under injunctions
from the courts of competent jurisdiction for improper practices in connection
with securities.”4 At the time Section 9 was adopted, investment
companies typically were managed by relatively small partnerships. It could not
have been foreseen that investment advisers and other service providers to
investment companies would in the future be part of large financial service
organizations like those of TD Ameritrade Holding and TD Bank. As a result, the
drafters of the provision could not have intended that Section 9 would operate
as it does in the present case. That is, it was not intended that a RIC would
have to be deprived of its investment advisory, distribution, and other services
because of alleged violations that are not even remotely related to Fund Service
Activities. In the absence of improper practices relating to their Fund Service
Activities, therefore, the Applicants submit that Section 9(a) should not
operate to bar them from serving Funds and their shareholders.
As a
result of the foregoing, the conduct of the Applicants has not been such to make
it against the public interest or the protection of investors to grant the
Application.
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B.
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Adverse Effect on
Applicants
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The Judgment subjects each of the
Applicants that serve as investment adviser or sub-adviser to the Funds (the
“Adviser Applicants”)5 to the prohibitions of Section 9(a) of the Act
solely because Investools is an affiliated person of these companies within the
meaning of the Act. Only Investools is subject to the Judgment and
was alleged to have been involved in the activities that form the basis for the
Judgment. No director, officer, or employee of the Applicants who is
or was involved in providing advisory or sub-advisory services to the Funds
participated in the alleged conduct that resulted in the
Injunction.
If the
Adviser Applicants were barred under Section 9(a) from providing investment
advisory services to Funds and were unable to obtain the requested exemption,
the effect on their businesses and employees would be severe. The Adviser
Applicants have committed substantial capital and other resources to
establishing expertise in advising and sub-advising Funds. Without relief under
Section 9(c), the Adviser Applicants would be prevented from offering
advisory
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4
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Investment
Trusts and Investment Companies: Hearings on S. 3580 Before the Subcomm.
on Securities and Exchange of the Senate Comm. on Banking and Currency,
76th Cong., 3d Sess. 874 (1940) (statement of Judge
Healy).
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5
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The
Adviser Applicants are Amerivest and TDAM
USA.
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services
that represent a valuable part of the total financial services they offer. In
the case of certain Adviser Applicants, the effects would be particularly dire,
as investment advisory activities to certain Funds represent a very substantial
part of their business.
Prohibiting
the Applicants from engaging in Fund Service Activities would not only adversely
affect their business, but would also adversely affect their employees who are
involved in these activities. Approximately 52 employees of the Applicants are
actively involved in the provision of Fund Service Activities (not including the
many other employees of the Applicants and their affiliates who would be
adversely affected if they could no longer offer the Funds to their
customers). Many of these employees could experience significant
difficulties in finding alternative, fund-related employment. For these reasons,
the imposition of the Section 9(a) disqualification on the Adviser Applicants
would be unduly and disproportionately severe.
Disqualifying
the Applicants from continuing to provide investment advisory services as
investment adviser is not in the public interest or in furtherance of the
protection of investors.
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C.
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Involvement of
Applicants’ Personnel
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None of the current or former
directors, officers, or employees of the Applicants, other than Investools, had
any knowledge of, or any participation in, the violative conduct alleged in the
Complaint. In addition, the conduct described in the Complaint did
not involve the assets of any of the Funds. Therefore, the Funds to
which Applicants provided advisory or sub-advisory services would not have been
affected any differently if companies not affiliated with TD Ameritrade Holding
or TD Bank had provided such services to those Funds. Applicants further state
that the individual defendants named in the Complaint are no longer employed at
Investools. The personnel at Investools who were involved in the violations
alleged in the Complaint have had no, and will not have any future, involvement
in providing Fund Service Activities to Funds.
As a result of the foregoing, it is
clear that Applicants’ conduct has not been such as to make it against the
public interest or protection of investors to grant their
Application.
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D.
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Actions Taken with
Respect to the Funds
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To
provide further assurance that the exemptive relief being requested herein would
be consistent with the public interest and the protection of investors, the
Applicants agree that they will, as soon as reasonably practicable and to the
extent not already completed, distribute to the boards of directors (“Boards”)
of the Funds written materials describing the circumstances that led to the
Injunction, any impact on the Funds and this Application. The written materials
will include an offer to discuss the materials at an in-person meeting with each
Board for which any of the Applicants provides Fund Service Activities,
including the directors who are not “interested persons” of such 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, if any. These written
materials will concern the Judgment, this Application, and any impact on the
Funds of the Judgment and/or the Application. The
Applicants undertake to provide such Funds’ Boards with all information
concerning the Judgment and this Application necessary for those Funds to
fulfill their disclosure and other obligations under the federal securities
laws.
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E.
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Hardships on the RICs
and their Shareholders
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The
inability of the Adviser Applicants to continue providing such services to the
Funds would result in the Funds and their shareholders facing potential
hardship. Neither the protection of investors nor the public interest would be
served by permitting the Section 9(a) disqualifications to apply to the Adviser
Applicants because those disqualifications would deprive the Funds of the
advisory or sub-advisory services that shareholders expected the Funds would
receive when they decided to invest in the Funds. Uncertainty caused by
prohibiting the Adviser Applicants that currently serve as investment advisers
to Funds from continuing to serve the Funds in an advisory or sub-advisory
capacity would disrupt investment strategies and might result in large net
redemptions of shares of the Funds, which could frustrate efforts to manage
effectively the Funds’ assets and could increase the Funds’ expense ratios to
the detriment of non-redeeming shareholders. In addition, disqualifying the
Adviser Applicants could result in substantial costs to the Funds and others
because of the need to obtain shareholder approvals of new investment advisory
or sub-advisory agreements with a new adviser or sub-adviser. The costs of
obtaining such approvals could be substantial and would include the costs of:
(1) identifying a suitable successor investment adviser or sub-adviser; (2)
calling a special meeting of the boards of directors of the Funds; (3)
preparing, printing and mailing proxy materials to all shareholders; (4)
actively soliciting shareholder proxies and tabulating those proxies; and (5)
holding the shareholder meetings. The prohibitions of Section 9(a) could,
therefore, operate to the financial detriment of the Funds and their
shareholders.
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F.
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Applicants’ Prior
Section 9(c) Orders
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Certain of the Applicants (or their
predecessors) previously have applied for and obtained exemptive relief under an
order issued pursuant to Section 9(c) in relation to Regulations U and X
promulgated by the Federal Reserve Board. The complaint giving rise
to this matter alleged that TD Bank had violated the margin lending requirements
of Regulation U and The Toronto-Dominion Bank Trust Company had aided and
abetted violations by customers of Regulation X.
TD Bank, TD Investment Management
Inc., 6 TD Securities (USA) Inc., TD Waterhouse Asset
Management, Inc.,7 TD Waterhouse Investor Services, Inc. and CT
Investment Counsel (U.S.), Inc. requested and received exemptive relief.8 Because this previously obtained Section 9(c)
order was necessitated by enforcement actions brought by the Commission in the
past with respect to facts and circumstances that do not bear on this
Application, it should have little, if any, relevance to whether this
Application is granted. Rather, the Application should be judged on its own
merits.
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6
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On
May 31, 2005, TD Investment Management Inc. merged with and into TD Asset
Management USA Inc. On July 31, 2008, TD Asset Management USA Inc. changed
its name to TDAM USA Inc.
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7
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TD
Waterhouse Asset Management, Inc. subsequently changed its name to TD
Asset Management USA Inc. on May 13, 2005, which in turn changed its name
to TDAM USA Inc. on July 31,
2008.
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8
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Investment
Company Act Release Nos. 24486 (May 31, 2000) (notice and temporary order)
and 24555 (July 11, 2000) (permanent
order)
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The
Applicants agree that any order granted by the Commission pursuant to this
Application will be subject to the following condition:
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.
For the
reasons set forth above, each of the Applicants meets the standards for
exemption specified in Section 9(c) of the Act and, therefore, respectfully
applies for the entry of the following orders by the Commission as soon as may
be practicable:
1. that,
pursuant to Section 9(c) of the Act, each of the Applicants and the other
Covered Persons be temporarily exempted from any of the provisions of Section
9(a) of the Act that might otherwise be operative as a result of the Judgment
pending final determination by the Commission of the Application for an order
permanently exempting the Applicants and the other Covered Persons from any of
the provisions of Section 9(a) of the Act that might otherwise be operative as a
result of the Judgment; and
2. that,
pursuant to Section 9(c) of the Act, each of the Applicants and the other
Covered Persons be permanently exempted from any of the provisions of Section
9(a) of the Act that might otherwise be operative as a result of the
Judgment.
Pursuant
to Rule 0-2(f) under the Act, the Applicants state that their addresses are as
indicated on the cover page of this Application and further state that all
communications or questions concerning this Application should be directed
to:
Investools
Inc.
13947 S.
Minuteman Dr.
Amerivest
Investment Management, LLC
1005
North Ameritrade Place
TDAM USA
Inc.
161 Bay
Street
35th
Floor, TD Canada Trust Tower
Toronto,
Ontario
Canada
M5J 2T2
with a
copy to:
Sarah E.
Cogan
Ellen
Patterson
Simpson
Thacher & Bartlett LLP
425
Lexington Avenue
(212)
455-2000
The
Applicants request that the Commission issue the requested Orders pursuant to
Rule 0-5 under the Act without conducting a hearing.
Pursuant
to Rule 0-2(c)(l) under the Act, each Applicant states that under the provisions
of each Applicant’s governing instruments, the responsibility for the management
of its affairs and business is vested in its Chief Executive Officer, Board of
Directors, officers or other governing body, as applicable. Each Applicant
represents that the undersigned individual is authorized to file this
Application in its name and on its behalf. The certifications required by Rule
0-2(c)(l) under the Act are attached as Exhibits A-1 through A-4 of this
Application, and the verifications required by Rule 0-2(d) under the Act are
included in the signature pages to this Application.
