[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