[Federal Register Volume 68, Number 215 (Thursday, November 6, 2003)]
[Notices]
[Pages 62848-62849]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-27988]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26239; 812-12959]


J.P. Morgan Securities 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'').

-----------------------------------------------------------------------

Summary of Application: Applicants have received a temporary order 
exempting Covered Persons (as defined below) from section 9(a) of the 
Act, with respect to an injunction entered against J.P. Morgan 
Securities Inc. (``JPMSI'') 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: JPMSI, JF International Management Inc., J.P. Morgan 
Alternative Asset Management, Inc., J.P. Morgan Fleming Asset 
Management (London) Limited and J.P. Morgan Investment Management Inc. 
(together, the ``Applicants'').\1\
---------------------------------------------------------------------------

    \1\ Applicants request that any relief granted pursuant to the 
application also apply to any other company of which JPMSI is, or 
hereafter becomes, an affiliated person within the meaning of 
section 2(a)(3) of the Act (together with Applicants, ``Covered 
Persons'').

Filing Dates: The application was filed on April 28, 2003, and amended 
on June 12, 2003 and on August 26, 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 
additional amendments to the application reflecting the issuance of 
---------------------------------------------------------------------------
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 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 Scott G. Campbell, J.P. Morgan Chase & Co., 
One Chase Manhattan Plaza, New York, NY 10081.

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. JPMSI, 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. Certain Applicants serve as investment adviser or 
subadviser for one or more registered investment companies (``Funds''). 
Certain Applicants may in the future act as the depositor or principal 
underwriter for Funds.\2\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    2. On October 31, 2003, the U.S. District Court for the Southern 
District of New York entered the Federal Injunction against JPMSI in a 
matter brought by the Commission.\3\ The Commission alleged in the 
complaint (``Complaint'') that JPMSI 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 JPMSI's 
investment banking business (the ``Investment Banking Department'') 
over the research analysts in JPMSI's research department (the 
``Research Department''). The Federal Injunction enjoined JPMSI 
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, JPMSI consented to the 
entry of the Federal Injunction as well as the payment of disgorgement 
and penalties and other equitable relief, including undertakings by 
JPMSI to adopt and implement policies and procedures relating to 
certain research activities. Applicants state that JPMSI 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 Covered Persons under section 9(a) resulting from 
the Injunctions.
---------------------------------------------------------------------------

    \3\ Securities and Exchange Commission v. J.P. Morgan Securities 
Inc., 03 CV 2939 (WHP) (S.D.N.Y., filed April 28, 2003).
---------------------------------------------------------------------------

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

[[Page 62849]]

person'' to include any person directly or indirectly controlling, 
controlled by, or under common control with, the other person. 
Applicants state that JPMSI is an affiliated person of each of the 
other Applicants within the meaning of section 2(a)(3) of the Act. 
Applicants further state that the entry of the Injunctions would result 
in Covered Persons 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 
temporary and permanent orders 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 Covered Persons 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 the Complaint did not expressly reference 
the conduct of any current or former officer or employee of any of the 
Applicants who is or was involved in providing advisory or subadvisory 
services to the Funds advised or subadvised by Applicants.\4\ 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. Although some of the Funds held 
securities in their portfolios at the time that JPMSI 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 made any investment 
decisions based on any non-public information relating to the conduct 
underlying the Final Judgment. In addition, each of the Applicants that 
serves as an investment adviser or subadviser 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 employees of the Research and Investment Banking 
Departments. 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 JPMSI.
---------------------------------------------------------------------------

    \4\ The Complaint refers to general practices regarding the 
relationship between the Investment Banking and Research 
Departments. It is possible that one or more current or former 
officers or employees of the Applicants who is or was involved in 
providing advisory or sub-advisory services to the Funds was at some 
time an officer or employer of the Investment Baning or Research 
Department.
---------------------------------------------------------------------------

    5. The Applicants have distributed, or 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 Injunctions, any 
impact on the Funds, and this application. 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.
    6. Applicants state that the inability to continue providing 
advisory services 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 subadvising Funds. As described 
in greater detail in the application, certain Applicants recently 
applied for, and received, exemptions pursuant to section 9(c) for 
conduct that triggered section 9(a) 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 
Covered Persons 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. 03-27988 Filed 11-5-03; 8:45 am]
BILLING CODE 8010-01-P