[Federal Register Volume 68, Number 215 (Thursday, November 6, 2003)]
[Notices]
[Pages 62840-62842]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-27981]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26237; 812-12967]


Bear, Stearns & Co. Inc., et al; Notice of Application and 
Temporary Order

October 31, 2003.

AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Temporary order and notice of application for a permanent order 
under section 9(c) of the Investment Company Act of 1940 (``Act'').

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Summary of Application: Applicants have received a temporary order 
exempting them from section 9(a) of the Act, with respect to an 
injunction entered against Bear, Stearns & Co. Inc. (``BS&Co.'') on 
October 31, 2003 by the U.S. District Court for the Southern District 
of New York (the ``Federal Injunction''), until the earlier of the date 
the Commission takes action on an application for a permanent order, or 
two years from the date of the Federal Injunction. Applicants have 
requested a permanent order.

Applicants: BS&Co. and Bear Stearns Asset Management Inc. (``BSAM'' and 
together, the ``Applicants'').\1\
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    \1\ Applicants request that any relief granted pursuant to the 
application also apply to any other company of which BS&Co. is or 
hereafter becomes an affiliated person (included in the term 
Applicants).

Filing Dates: The application was filed on April 28, 2003. Applicants 
have agreed to file an amendment during the notice period, the 
substance of which is reflected in this notice. Applicants have also 
agreed to file amendments to the application reflecting the issuance of 
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each State Injunction (as defined below).

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 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 25, 2003, and should be accompanied by proof of 
service on Applicants, in the form of an

[[Page 62841]]

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.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC 
20549-0609. Applicants, c/o Stephen Bornstein, Bear Stearns Asset 
Management Inc., 383 Madison Avenue, New York, NY 10179.

FOR FURTHER INFORMATION CONTACT: Stacy L. Fuller, Senior Counsel, or 
Todd F. Kuehl, 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 may be obtained 
for a fee at the Commission's Public Reference Branch, 450 Fifth 
Street, NW., Washington, DC 20549-0102 (telephone 202-942-8090).

Applicants' Representations

    1. BS&Co., a Delaware corporation, is a full service investment 
banking firm, engaged in securities underwriting, sales and trading, 
investment banking, financial advisory services, and investment 
research services. BSAM serves as investment adviser or subadviser for 
one or more registered investment companies (``Funds''). BS&Co. acts as 
the depositor or principal underwriter for Funds.\2\
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    \2\ Any registered unit investment trusts (``UIT'') or 
registered face amount certificate company for which Applicants may 
serve as principal underwriter or depositor are also included in the 
defined term Funds.
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    2. On October 31, 2003, the U.S. District Court for the Southern 
District of New York entered the Federal Injunction against BS&Co. in a 
matter brought by the Commission.\3\ The Commission alleged in the 
complaint (``Complaint'') that BS&Co. violated certain Conduct Rules of 
the National Association of Securities Dealers (``NASD'') and Rules of 
the New York Stock Exchange (``NYSE'') (the NASD Conduct Rules and NYSE 
Rules together, the ``Exchange Rules'') by engaging in acts and 
practices that created or maintained inappropriate influence by 
BS&Co.'s investment banking business (the ``Investment Banking 
Department'') over the research analysts in BS&Co.'s research 
department (the ``Research Department''). The Federal Injunction 
enjoined BS&Co. directly or through its officers, directors, agents and 
employees, from violating the specific rules cited in the Complaint. 
Without admitting or denying the allegations in the Complaint, BS&Co. 
consented to the entry of the Federal Injunction as well as the payment 
of disgorgement and penalties and other equitable relief, including 
undertakings by BS&Co. to adopt and implement policies and procedures 
relating to certain research activities. Applicants state that BS&Co. 
expects to enter into settlement agreements relating to the activities 
referred to in the Complaint with certain state and territorial 
agencies which may result in an injunction by a court of competent 
jurisdiction that is based on the same conduct and the same facts as 
the Complaint (each, a ``State Injunction,'' and, together with the 
Federal Injunction, the ``Injunctions''). Applicants request that this 
application cover any disqualifications of the Applicants under section 
9(a) resulting from the Injunctions.
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    \3\ Securities and Exchange Commission v. Bear, Stearns & Co. 
Inc., 03 CV 2937 (WHP) (S.D.N.Y., filed April 28, 2003).
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Applicants' Legal Analysis

    1. Section 9(a)(2) 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 an investment adviser or depositor of 
any registered investment company or a principal underwriter for any 
registered open-end investment company, registered UIT or registered 
face-amount certificate company. Section 9(a)(3) of the Act makes the 
prohibition in section 9(a)(2) applicable to a company, any affiliated 
person of which has been disqualified under the provisions of section 
9(a)(2). Section 2(a)(3) of the Act defines ``affiliated person'' to 
include any person directly or indirectly controlling, controlled by, 
or under common control with, the other person. Applicants state that 
BS&Co. is an affiliated person of BSAM within the meaning of section 
2(a)(3) of the Act. Applicants further state that the entry of the 
Injunctions would result in Applicants being subject to the 
disqualification provisions of section 9(a) of the Act.
    2. Section 9(c) of the Act provides that the Commission shall grant 
an application for exemption from the disqualification provisions of 
section 9(a) if it is established that these provisions, as applied to 
Applicants, are unduly or disproportionately severe or that the 
Applicants' conduct has been such as not to make it against the public 
interest or the protection of investors to grant the application. 
Applicants have filed an application pursuant to section 9(c) seeking a 
temporary and permanent order exempting them from the disqualification 
provisions of section 9(a) of the Act.
    3. Applicants believe they meet the standard for exemption 
specified in section 9(c). Applicants state that the prohibitions of 
section 9(a) as applied to them would be unduly and disproportionately 
severe and that the conduct of Applicants 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).
    4. Applicants state that the conduct giving rise to the Injunctions 
did not involve any of the Applicants acting in the capacity of 
investment adviser, subadviser, depositor, or principal underwriter for 
a Fund. Applicants state that none of the current or former officers or 
employees of the Applicants, who served or serves as adviser, 
subadviser, principal underwriter or depositor to the Funds, was 
involved in the conduct that forms the basis of the Complaint. While 
the Applicants' portfolio managers had access to research reports 
issued by the Research Department, there is no indication that the 
portfolio managers relied on these research reports more than any other 
data that would have been considered by the portfolio managers in 
making investment decisions for the Funds, except as noted in the 
application.\4\ Although some of the Funds held securities in their 
portfolios at the time that BS&Co. issued research reports concerning 
the issuers of such securities, as far as Applicants are aware, none of 
the officers, portfolio managers, or any other investment personnel 
employed by the Applicants had any knowledge of any non-public 
information relating to, or had any involvement in, the conduct 
underlying the Final Judgment. In addition, each of the Applicants that 
serve as an investment adviser or sub-adviser to Funds has adopted 
policies regarding information barriers (the ``Policies'') designed to 
protect the Funds from any conflict of interest that may arise between 
portfolio managers and other employees of BS&Co. The Policies, which 
were in effect at the time of the conduct described in the Complaint, 
restrict communications between portfolio managers and certain other 
employees of BS&Co.
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    \4\ Applicants state that they act as investment adviser to one 
Fund whose portfolio securities were selected based primarily on a 
list of recommended securities compiled by the Research Department.

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[[Page 62842]]

    5. The Applicants will distribute written materials, including an 
offer to meet in person to discuss the materials, to the board of 
directors or trustees of each Fund (each, a ``Board''), including the 
directors who are not ``interested persons,'' as defined in section 
2(a)(19) of the Act, of the Fund, and their independent legal counsel, 
if any, regarding the Federal Injunction, any impact on the Funds, and 
this application.\5\ The Applicants will provide the Boards with all 
information concerning the Injunctions and this application that is 
necessary for the Funds to fulfill their disclosure and other 
obligations under the federal securities laws.
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    \5\ Applicants will advise the Boards of any State Injunctions 
that are issued.
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    6.Applicants state that the inability to continue providing 
advisory services to the Funds and the inability to continue serving as 
principal underwriter to the Funds would result in potentially severe 
hardships for the Funds and their shareholders. Applicants also assert 
that, if they were barred from providing services to the Funds, the 
effect on their businesses and employees would be severe. The 
Applicants state that they have committed substantial resources to 
establish an expertise in advising and distributing Funds. Applicants 
state that no Applicant has previously applied for an exemption 
pursuant to section 9(c) of the Act.

Applicants' Condition

    Applicants agree that any order granting the requested relief 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, 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.

Temporary Order

    The Commission has considered the matter and finds that Applicants 
have made the necessary showing to justify granting a temporary 
exemption.
    Accordingly,
    It is hereby ordered, pursuant to section 9(c) of the Act, that the 
Applicants are granted a temporary exemption from the provisions of 
section 9(a), effective forthwith, solely with respect to the 
Injunctions, subject to the condition in the application, until the 
date the Commission takes final action on their application for a 
permanent order or, if earlier, October 31, 2005.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-27981 Filed 11-5-03; 8:45 am]
BILLING CODE 8010-01-P