[Federal Register Volume 64, Number 198 (Thursday, October 14, 1999)]
[Notices]
[Pages 55790-55793]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26792]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-24076; 812-11498]
Stephens Group, Inc. et al.; Notice of Application
AGENCY: Securities and Exchange Commission (``Commission'').
[[Page 55791]]
ACTION: Notice of application for permanent order under section 9(c) of
the Investment Company Act of 1940 (the ``Act'').
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SUMMARY: Applicants request a permanent order exempting them from
section 9(a) of the Act with respect to a securities-related injunction
entered in 1978.
APPLICANTS: Stephens Group, Inc. (``Stephens''), Stephens Inc.
(``SI''), and Jackson T. Stephens (``Mr. Stephens'').
FILING DATE: The application was filed on February 5, 1999, and amended
on September 7, 1999.
HEARING OR NOTIFICATION OF 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 November 1, 1999
and should be accompanied by proof of service on applicants in the form
of an affidavit or, for lawyers, a certificate of service. Hearing
requests should state the nature of the writer's interest, 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. An order granting the application will be
issued unless the Commission orders a hearing or extends the temporary
exemption.
ADDRESSES: Secretary, and Securities and Exchange Commission, 450 Fifth
Street, NW, Washington, DC 20549-0609; Applicants, 111 Center Street,
Little Rock, AR 72201.
FOR FURTHER INFORMATION CONTACT: Janet M. Grossnickle, Attorney-
Adviser, at (202) 942-0526, or Mary Kay French, Branch Chief, at (202)
942-0564, Division of Investment Management, Office of Investment
Company Regulation.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application is available for a fee from the
Commission's Public Reference Branch, 450 Fifth Street, NW, Washington,
DC 20549-0102 (tel. 202-942-8090).
Applicant's Representations
1. Stephens is an Arkansas corporation formed in 1933. Stephens,
directly and through its subsidiaries, engages in a broad-based
merchant and investment banking business. Stephens Holding Company
(``Stephens Holding''), a wholly owned subsidiary of Stephens, owns SI,
a broker-dealer registered under the Securities Exchange Act of 1934
(``Exchange Act'') and an investment adviser registered under the
Investment Advisers Act of 1940 (``Advisers Act'').
2. Mr. Stephens served as Stephens' chief executive officer and
chairman of the board of directors from 1956 until 1986. Mr. Stephens
currently serves as chairman of the board of directors of Stephens and
Stephens Holding. Mr. Stephens is not an officer or director of SI.\1\
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\1\ Mr. Stephens is a registered representative with SI and
would be considered an employee and associated person of SI.
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3. SI has served as principal underwriter and administrator for
registered investment companies (``funds'') since 1988. SI currently
serves in those capacities for three sets of bank proprietary funds:
Stagecoach Funds advised by Wells Fargo Bank, Barclays Global Investor
Funds advised by Barclays Global Investors, and Nations Funds advised
by NationsBank Advisors, Inc., a wholly-owned subsidiary of Bank of
America (collectively, ``Bank Funds''). The Bank Funds include 127
individual funds with total assets in excess of $100 billion.
4. It is anticipated that, in connection with a recent merger
between Wells Fargo & Company and Norwest Corporation, certain
Stagecoach Funds may be merged with certain funds advised by
subsidiaries of Norwest Corporation. In addition, in connection with
the merger of BankAmerica and NationsBank, certain of the Pacific
Horizon Funds, the propriety funds of BankAmerica, have been merged
with Nations Funds. The two mergers are collectively referred to in
this notice of the ``Bank Funds Merger.'' SI is serving or will serve
as a principal underwriter and administrator to the merged funds.
5. In 1997, Stephens Capital Management, a division of SI, also
began serving as a subadviser to Stephens Intermediate Bond Fund, a
fund advised by Diversified Investment Advisors, Inc. (``Subadvised
Fund''). The Subadvised Fund has approximately $25 million in assets.
6. On March 18, 1978, Stephens and Mr. Stephens consented to
judgments of permanent injunction issued by the U.S. District Court for
the District of Columbia in a matter brought by the Commission (``1978
Injunction'').\2\ The Commission alleged that Stephens and Mr. Stephens
acted as part of a group of persons, within the meaning of section
13(d) of the Exchange Act, for the purpose of acquiring, holding or
disposing of the common stock of Financial General BankShares Inc., a
bank holding company, and did not make the filings required by section
13(d) of the Exchange Act. In consenting to the 1978 Injunction,
Stephens undertook, among other things, to implement and maintain
certain procedures designed to prevent future violations of section
13(d) of the Exchange Act. SI disclosed the 1978 Injunction on both its
Form ADV filed under the Advisers Act and Form BD filed under the
Exchange Act.\3\
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\2\ SEC. v. BCCI, et al. (U.S.D.Ct., D.C. Mar. 18, 1978) (Final
Judgment of Permanent Injunction and Other Equitable Relief).
\3\ In 1980, Stephens and Mr. Stephens also sought and received
relief from the Commission removing a bar arising from the 1978
Injunction on their ability to rely on Regulation A under the
Securities Act of 1933. Letter from George A. Fitzsimmons,
Secretary. SEC to Larry W. Burks (Nov. 17, 1980).
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7. Applicants state that they did not seek an order under section
9(c) around the time of the 1978 Injunction because SI did not begin to
engage in any fund-related activities until 1988. Applicants also state
that they did not become aware of the section 9(a) violation until late
November 1998, when the violation was discovered by counsel in
preparation for the Bank Funds Merger.
8. Since the 1978 Injunction, Stephens has been involved in a
number of securities related administrative proceedings with the
Commission, state securities regulators and self-regulatory
organizations. Three of these proceedings involved SI's investment
advisory and fund-related activities. In 1997, SI consented to the
imposition of a cease-and-desist order by the Commission that found,
among other things, that SI violated the Advisers Act by failing to
provide its clients with adequate disclosure concerning principal
transactions in securities.\4\ In 1996, SI entered into a consent order
with the National Association of Securities Dealers, Inc. (``NASD'')
accepting, among other things, a finding by the NASD that SI failed to
exercise reasonable supervision over its representatives in connection
with wholesale marketing of two closed-end funds.\5\ In 1995, entered
into an administrative settlement order with the Securities Division of
the Massachusetts Secretary of State in connection with SI's failure
not to sell shares of an open-end fund to 23 purchasers in
Massachusetts prior to registration in Massachusetts.\6\ Applicants
state that none of the other administrative proceedings, all of which
are listed in an exhibit to the application, involved
[[Page 55792]]
Stephens' investment advisory or fund-related activities.
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\4\ Advisers Act Release No. 1666 (Sept. 16, 1997).
\5\ Letter of Acceptance, Waiver and Consent No. C059600 (Oct.
14, 1996).
\6\ In the Matter of Stephens, Inc., No. E-94-108 (Feb. 16,
1995) (settlement order).
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Applicants' Legal Analysis
1. Section 9(a) of the Act, in relevant part, prohibits a person
who has been enjoined from engaging in or continuing any conduct or
practice in connection with the purchase or sale of a security from
acting, among other things, as a principal underwriter or investment
adviser for a registered investment company. Applicants state that, as
result of the 1978 Injunction, Stephens and Mr. Stephens may be
prohibited by section 9(a) from serving underwriter or investment
adviser to funds.
2. Section 9(c) of the Act provides the Commission shall grant an
application for an exemption from the disqualification provisions of
section 9(a) if it is established that these provisions, as applied to
the applicant, are unduly or disproportionately severe or that the
conduct of applicant has been such as not to make it against the public
interest or the protection of investors to grant the application.
3. Applicants seek a permanent order under section 9(c) with
respect to the 1978 Injunction to permit SI to continue to serve as
principal underwriter and investment adviser to funds, including the
Bank Funds and the Subadvised Fund.\7\ As noted above, applicants state
that they did not seek an order under section 9(c) around the time of
1978 Injunction because SI did not begin to engage in any fund-related
activities until 1988. Applicants also state that they did not become
aware of the section 9(a) violation until late November 1998, when the
violation was discovered by counsel in preparation from the Bank Funds
Merger.
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\7\ On February 5, 1999, the Commission simultaneously issued a
notice of the filing of the application and a temporary conditional
order exempting applicants from section 9(a) of the Act until April
5 1999. Stephens Groups, Inc., et al., Investment Company Act
Release No. 23682 (Feb. 5, 1999). On April 2, 1999, the Commission
issued an order extending the temporary exemption until August 5,
1999. In the Matter of Stephens Group Inc., et al., Investment
Company Act Release No. 23769 (Apr. 2, 1999). On August 5, 1999, the
Commission issued an order extending the temporary exemption until
the date on which the Commission takes final action on the
application for a permanent order exempting applicants from section
9(a) of the Act or, if earlier, November 5, 1999. In the Matter of
Stephens Group Inc., et al., Investment Company Act Release No.
23935 (Aug. 5, 1999).
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4. SI has undertaken to develop procedures designed to prevent
violations of section 9(a) by SI and its affiliated persons. Further,
SI's general counsel has attested that he has reviewed SI's compliance
policies and procedures relating to compliance with section 9(a); that
he reasonably believes that the policies and procedures have been fully
implemented; and that the policies and procedures are designed
reasonably to prevent violations of section 9(a) by SI and its
affiliated persons.
5. Applicants state that the prohibitions of section 9(a) as
applied to them would be unduly and is proportionately severe.
Applicants assert that SI's ability to act as a principal underwriter
to the Bank Funds and as a subadviser to the Subadvised Fund would
result in the Funds and their shareholders facing potentially severe
hardships. Applicants state that the Bank Funds would incur significant
time, effort and expense to replicate the extensive selling network
established by SI, and the disruption may have a significant effect on
the management and expense ratios of the Bank Funds. Applicants also
state that the Subadvised Fund would face similar consequences if
required to change the subadviser. Applicants assert that
representatives of the Band Funds and the Subadvised Funds have
expressed satisfaction with the services provided by SI and a desire
that SI continue to provide the services.
6. Applicants state that the boards of directors, including the
disinterested directors, of the Bank Funds and the Subadvised Funds
(``Boards'') have been apprised of Stephens's section 9(a) violation.
Applicants represent that the Boards have determined that retaining SI
as a principal underwriter (in the case of Bank Funds) or as a
subadviser (in the case of the Subadvised Fund) is in the best
interests of the Funds and their shareholders. Applicants further
represent that the boards of directors of the funds with which certain
of the Bank Funds are expected to merge considered the 1978 Injunction
in determining whether to approve the proposed mergers.
7. Applicants assert that if SI were prohibited from providing
services to the Bank Funds and the Subadvised Fund, the effect on SI's
business and employees would be severe. Applicants state that SI has
committed substantial resources over the past 10 years to establishing
expertise in servicing funds, has developed extensive selling networks,
and has over 80 employees dedicated to providing fund distribution and
subadvisory services.
8. Applicants state that Mr. Stephens has at no time in the past
been involved in SI's fund-related activities and will not be involved
in that business in the future. Applicants also note that one of the
conditions to the requested relief provides that Mr. Stephens will not
be involved in SI's business of providing services to funds, and
requires applicants to develop appropriate procedures.
9. Applicants also assert that their conduct has been such as not
to make it against the public interest or the protection of investors
to grant the exemption from section 9(a). Applicants note that over 20
years have passed since the 1978 Injunctions. Applicants also note that
the 1978 Injunction did not in any way involve fund-related activities.
Applicants further state that since the 1978 Injunction, neither SI nor
any affiliated persons of SI has engaged in conduct that would result
in disqualification under section 9(a) of the Act.
10. Applicants assert that SI has implemented policies and
procedures designed to improve its securities law compliance. In
addition, SI represents that it is taking, or has taken, the following
specific actions. To the extent certain of these actions have not been
completed yet, SI represents that they will be completed as soon as
practicable.
a. Review and Modification of Compliance Policies and Procedures.
The Legal and Compliance Departments are in the process of reviewing
and updating SI's existing compliance policies and procedures,
including policing and procedures related to its mutual fund
distribution, administration and advisory operations. As part of this
review, as appropriate, new policies and procedures are being designed
and implemented; unneeded policies and procedures are being eliminated;
and any inconsistencies among existing policies and procedures are
being eliminated. The compliance policies and procedures are being
consolidated into ``user-friendly'' manuals or LAN based systems
(``Compliance Manuals''). Checklists, guidelines, worksheets, closing
certificates and similar documents are being prepared to guide
operating and compliance personnel in following compliance policies and
procedures and in documenting compliance. SI is in the process of
filling a newly-created compliance position, that will involve
overseeing particular policies and procedures and ensuring that they
are implemented and followed.
b. Reporting and Periodic Review. SI has adopted procedures that
require its Legal and Compliance Departments to report to senior
management of SI and its board of directors at regular intervals on the
compliance program. These policies require the Legal and Compliance
Departments, with the assistance of outside counsel and
[[Page 55793]]
compliance consultants, as appropriate, to conduct periodic reviews and
evaluations of the compliance policies and procedures, as well as the
operation of the compliance program as a whole. The Compliance Manuals
will be promptly updated to reflect any necessary changes resulting
from these reviews.
c. Compliance Documentation. SI is in the process of adopting
procedures to document, on an ongoing basis, the procedures to be
followed by Compliance Department personnel in performing particular
functions; the actions to be taken by Compliance Department personnel
as a result of following the procedures; and the actions to be taken by
Legal and Compliance Department personnel and management to enforce the
compliance policies and procedures. These policies will require
compliance documentation to be prepared in a manner to facilities
regulatory review of the factual background of the transactions or
matters at issue, as well as the actions taken by SI's personnel.
d. Compliance Training. SI has commenced, and will continue to
conduct, training on a firm-wide and departmental basis to ensure that
its employees understand the purposes and functions of the compliance
policies and procedures.
e. Professional Conduct Program. SI has developed, and is in the
process of adopting, a professional conduct code and supporting
infrastructure, including the assignment of senior management and Legal
Department personnel to design, implement and oversee SI's professional
conduct program (``Professional Conduct Program''). Under the
Professional Conduct Program, SI will conduct comprehensive yearly
professional conduct training. SI is in the process of implementing
employee assistance procedures, that will be administered by third-
party vendors and senior Legal Department personnel, to answer employee
questions and address grievances. Once the Professional Conduct Program
is adopted, SI will conduct periodic review and evaluation of the
program with a view to enhancing and strengthening it.
Applicant's Conditions
Applicants agree that the following conditions may be imposed in
any order granting the requested relief:
1. Mr. Stephens will not be involved in SI's business of providing
services to register investment companies. Applicants will develop
procedures designed reasonably to assure compliance with this
condition.
2. For each to the three fiscal years beginning with the fiscal
year ending December 31, 1999, SI's general counsel will certify
annually that, after reasonable inquiry, he believes that SI has
complied with its compliance procedures and policies in all material
respects (and that any known material deviations from these policies
and procedures, and any series of like deviations that in the aggregate
are material, have been documented in SI's records), and that the
procedures and policies continue to be reasonably designed to ensure
SI's compliance with the federal securities laws. The certification
will be delivered to the Commission to be attention of the Assistant
Director, Office of Investment Company Regulation, Division of
Investment Management, within 60 days of the end of SI's fiscal year. A
copy of the certification will be maintained as part of the permanent
records of SI and a copy of each certification will be delivered to the
board of directors of each fund for which SI serves as distributor,
underwriter, administrator or investment adviser.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-26792 Filed 10-13-99; 8:45 am]
BILLING CODE 8010-01-M
