[Federal Register Volume 64, Number 28 (Thursday, February 11, 1999)]
[Notices]
[Pages 6930-6932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3319]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-23682; 812-11498]
Stephens Group, Inc. et al.; Temporary Order and Notice of
Application
February 5, 1999.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Temporary order and 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 have received a temporary order exempting them from
section 9(a) of the Act, with respect to a securities-related
injunction entered in 1978, until the Commission takes final action on
the application for a permanent order or, if earlier, April 5, 1999.
Applicants also have requested a permanent order.
APPLICANTS: Stephens Group, Inc. (``Stephens''), Stephens Inc.
(``SI''), and Jackson T. Stephens (``Mr. Stephens'').
FILING DATE: The application was filed on February 5, 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 March 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, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549; Applicants, 111 Center Street,
Little Rock, AR 72201.
FOR FURTHER INFORMATION CONTACT: Kathleen L. Knisely, Staff Attorney,
at (202) 942-0517, or Mary Kay Frech, Branch Chief, at (202) 942-0564,
Division of Investment Management, Office of Investment Company
Regulation.
SUPPLEMENTARY INFORMATION: The following is a temporary order and a
summary of the application. The complete application is available for a
fee from the Commission's Public Reference Branch, 450 Fifth Street,
N.W., Washington, D.C. 20549 (tel. 202-942-8090).
Applicants' Representations
1. Stephens is a 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, Masterworks Funds advised
by Barclays Global Investors, and Nations Funds advised by NationsBanc
Advisors, Inc., a wholly-owned subsidiary of Bank of America
(collectively, ``Bank Funds''). The Bank Funds include 119 individual
funds with total assets in excess of $71 billion.
4. It is anticipated that, in connection with a recent merger
between Wells Fargo & Company and Norwest Corporation, certain
Stagecoach Funds
[[Page 6931]]
may be merged with certain funds advised by subsidiaries of Norwest
Corporation. In addition, in connection with merger of BankAmerica and
NationsBank, Pacific Horizon Funds, the proprietary funds of
BankAmerica, may be merged with Nations Funds. The two mergers are
collectively referred to in this notice as the ``Banks Funds Merger.''
SI has been proposed to 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 $21 million in assets.
6. On March 18, 1978, Stephens consented to judgment 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. March 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 principle
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, SI
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 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
a result of the 1978 Injunction, Stephens and Mr. Stephens may be
prohibited by section 9(a) from serving as a principal underwriter or
investment adviser to funds.
2. Section 9(c) of the Act provides that 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 temporary and permanent orders 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. As noted above,
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.
4. SI has undertaken to develop procedures designed to prevent
violations of section 9(a) by SI and its affiliated persons. Applicants
also have agreed that, before any permanent relief may be granted
pursuant to the application, SI's general counsel must attest 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 disproportionately severe.
Applicants assert that SI's inability 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 Bank 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' section 9(a) violation.
Applicants represent that before any permanent relief is granted, the
Boards will consider whether 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
[[Page 6932]]
expected to merge will consider 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 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 Injunction. 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 person of SI has engaged in conduct that would result in
disqualification under section 9(a) of the Act. Applicants assert that
SI has implemented policies and procedures designed to improve its
securities law compliance.
9. 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.
Applicants' Conditions
Applicants agree that the following conditions may be imposed in
any order granting the requested relief:
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, applicants,
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. Before any permanent relief is granted pursuant to the
application, SI's General Counsel will attest that he has reviewed SI's
compliance policies and procedures relating to compliance with section
9(a) of the Act; 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.
3. Mr. Stephens will not be involved in SI's business of providing
services to registered investment companies. Applicants will develop
procedures designed reasonably to assure compliance with this
condition.
Temporary Order
The Division has considered the matter and, without necessarily
agreeing with all of the facts represented or all of the arguments
asserted by applicants, finds, in accordance with 17 CFR 200.30-
5(a)(7), that it appears that (i) the prohibitions of section 9(a), as
applied to applicants, may be unduly or disproportionately severe, (ii)
applicants' conduct has been such as not to make it against the public
interest or the protection of investors to grant the temporary
exemption, and (ii) granting the temporary exemption would protect the
interests of the investment companies served by applicants by allowing
time for the orderly consideration of the application for permanent
relief.
Accordingly, it is hereby ordered, under section 9(c), that
applicants are granted a temporary exemption from the provisions of
section 9(a), effective forthwith, solely with respect to the 1978
Injunction, subject to the conditions in the application, until the
Commission takes final action on the application for a permanent order
or, if earlier, April 5, 1999.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-3319 Filed 2-10-99; 8:45 am]
BILLING CODE 8010-01-M
