[Federal Register Volume 68, Number 230 (Monday, December 1, 2003)]
[Notices]
[Pages 67229-67231]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-29799]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26263; 812-12966]


Lehman Brothers Inc., et al.; Notice of Application

November 24, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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

SUMMARY OF APPLICATION: On October 31, 2003, the Commission issued a 
temporary order (``Temporary Order'') and notice of application for a 
permanent order (``Original Notice'') under section 9(c) of the Act.\1\ 
This notice reflects that Neuberger Berman, LLC (``Neuberger LLC'') and 
Neuberger Berman Management Inc. (``Neuberger Management,'' and 
together with Neuberger LLC, the ``Neuberger Applicants'') were added 
as named applicants after the issuance of the Original Notice. The 
Temporary Order, which also applied to the Neuberger Applicants, 
remains effective as issued.
---------------------------------------------------------------------------

    \1\ Invest Company Act Release No. 26241 (October 31, 2003).

Applicants: Lehman Brothers Inc. (``Lehman''), Lehman Brothers Asset 
Management Inc. (``LBAM''), Lincoln Capital Fixed Income Management 
Company, LLC (``Lincoln Capital''), and the Neuberger Applicants 
(together, the ``Applicants'').\2\
---------------------------------------------------------------------------

    \2\ Applicants request that any relief granted pursuant to the 
application also apply to any other company of which Lehman is or 
hereafter becomes an affiliated person (included in the term 
Applicants).

Filing Dates: The application was filed on April 28, 2003, and amended 
on November 21, 2003. Applicants have agreed to file 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 December 19, 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, Lehman, 745 Seventh Avenue, New York, NY 10019; 
LBAM, 399 Park Avenue, New York, NY 10022; Lincoln Capital, 200 S. 
Wacker Drive, Suite 2100, Chicago, IL 60606; and the Neuberger 
Applicants, 605 Third Avenue, New York, NY 10158.

FOR FURTHER INFORMATION CONTACT: Marc R. Ponchione, Senior Counsel, at 
(202) 942-7927, or Todd F. Kuehl, Branch Chief, at 202-942-0564 
(Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is 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. Lehman, a Delaware corporation, is a full service investment 
banking firm, which, among other activities, engages in securities 
offerings, including initial public offerings, secondary offerings and 
debt financings, and provides merger and acquisition and other 
services. LBAM serves as investment adviser to one registered 
investment company (``Fund''), Lincoln Capital serves as investment 
subadviser for eight Funds, and the Neuberger Applicants serve as 
investment adviser, sub-adviser, principal underwriter, or depositor to 
one or more Funds. Lehman acts as the depositor or principal 
underwriter for one or more Funds.\3\
---------------------------------------------------------------------------

    \3\ 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 an injunction (the ``Federal Injunction'') 
against Lehman in

[[Page 67230]]

a matter brought by the Commission.\4\ The Commission alleged in the 
complaint (``Complaint'') that Lehman 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 
Lehman's investment banking business (the ``Investment Banking 
Department'') over the research analysts in Lehman's research 
department (the ``Research Department''). The Federal Injunction 
enjoined Lehman 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, Lehman 
consented to the entry of the Federal Injunction as well as the payment 
of disgorgement and penalties and other equitable relief. Applicants 
state that Lehman 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) of the Act resulting from the Injunctions.
---------------------------------------------------------------------------

    \4\ Securities and Exchange Commission v. Lehman Brothers Inc., 
03 Civ. 2940 (WHP) (S.D.N.Y., filed April 28, 2003) (the 
``Action'').
---------------------------------------------------------------------------

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. Lehman is an affiliated 
person of each of LBAM, Lincoln Capital, and the Neuberger Applicants 
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 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.\5\
---------------------------------------------------------------------------

    \5\ On October 31, 2003, the Commission issued the Temporary 
Order exempting Applicants, including the Neuberger Applicants, from 
the provisions of section 9(a) until the date the Commission takes 
final action on their application for a permanent order or, if 
earlier, October 31, 2005 (Investment Company Act Release No. 
26241).
---------------------------------------------------------------------------

    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.\6\ Applicants state that the Complaint did not expressly 
reference the conduct of any current or former officer or employee of 
Lehman who is or was involved in providing underwriting services to the 
Funds underwritten by Lehman.\7\ While LBAM's, Lincoln Capital's, and 
the Neuberger Applicants' portfolio managers may have 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.\8\ 
Although some of the Funds held securities in their portfolios at the 
time that Lehman issued research reports concerning the issuers of such 
securities, Applicants state that Lincoln Capital and the Neuberger 
Applicants were not acquired by Lehman Holdings, and LBAM did not begin 
serving as investment adviser to any Fund, until after the time period 
covering the conduct that forms the basis for the Injunctions. As far 
as Lehman is aware, none of the current or former officers, employees, 
portfolio managers, or any other investment personnel employed by 
Lehman, who is or was involved in providing principal underwriting 
services to the Funds, acted in their capacity as such based on any 
non-public information relating to the conduct underlying the 
Injunctions. In addition, each of the Applicants that serve or may 
serve as an investment adviser or sub-adviser to Funds has adopted 
policies regarding information barriers designed to protect the Funds 
from any conflict of interest that may arise between portfolio managers 
and other employees of Lehman.
---------------------------------------------------------------------------

    \6\ Lehman Brothers Holdings Inc. (``Lehman Holdings''), the 
ultimate parent company of the Applicants, acquired Lincoln Capital 
on January 31, 2003, and acquired the Neuberger Applicants on 
October 31, 2003. The only Fund advised by LBAM was first registered 
on May 7, 2003. Each of these events occurred after the conduct 
giving rise to the Injunctions.
    \7\ The Complaint also 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, sub-advisory or underwriting services to the 
Funds, was at some time an officer or employee of the Investment 
Banking or Research Departments.
    \8\ Lehman states that it acts as principal underwriter to 
certain UITs whose portfolio securities were selected by an 
unaffiliated third party depositor based on information published by 
the Research Department.
---------------------------------------------------------------------------

    5. The Applicants have 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 that it advises, 
subadvises, or principally underwrites (each, a ``Board''), including 
the directors or trustees 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.\9\ 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

[[Page 67231]]

other obligations under the federal securities laws.
---------------------------------------------------------------------------

    \9\ The Applicants also will advise the Boards of any State 
Injunctions that are issued. With respect to the UITs discussed in 
footnote 6, Lehman states that it has provided or will provide 
written notification to the trustees for each of these UITs and 
their independent depositor concerning the Injunctions, any impact 
on the UITs, and this Application, and will provide any other 
related information that may be requested by the trustees or 
independent depositors.
---------------------------------------------------------------------------

    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. Lehman and 
certain affiliated persons of Lehman previously have received 
exemptions under section 9(c) as the result of conduct that triggered 
section 9(a) as described in greater detail in the Application.

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.


    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-29799 Filed 11-28-03; 8:45 am]
BILLING CODE 8010-01-P