SEC Division of Investment Management staff letter: Stephens Inc.

Home | Previous Page

Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web page for more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements .

Stephens Inc.

December 27, 2001

RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF INVESTMENT MANAGEMENT

Our Ref. No. 20011227103 Stephens Inc. File No. 801-15510 _____

We would not recommend enforcement action to the Commission under Section 206(4) of the Investment Advisers Act of 1940 ("Advisers Act") and Rule 206(4)-3 thereunder if any investment adviser that is required to be registered pursuant to Section 203 of the Advisers Act pays to Stephens Inc. ("Stephens"), a registered broker-dealer and investment adviser, or any of its associated persons, a cash fee for the solicitation of advisory clients in accordance with Rule 206(4)-3, 1 notwithstanding the existence of certain Commission administrative orders and a judgment of injunction from the U.S. District Court for the District of Columbia ("Actions"), each of which would otherwise preclude such an investment adviser from paying Stephens a solicitation fee. 2

Our position is based on the facts and representations in your letter dated December 21, 2001, particularly your representations that Stephens: (1) will conduct any solicitation arrangement entered into with any investment adviser that is required to be registered under Section 203 of the Advisers Act in compliance with all of the applicable provisions of Rule 206(4)-3; (2) will use its best efforts to ensure that any adviser with which it has a solicitation arrangement describes such arrangement to the extent required in response to any applicable item of such adviser's Form ADV; (3) will discuss the Actions in any separate written disclosure document required to be delivered by Stephens under Rule 206(4)-3, for a ten-year period from the date of the entry of each respective Action; and (4) is not currently engaged in any solicitation arrangements that would be subject to Rule 206(4)-3. This position applies only to the Actions and not to any other basis for disqualification under Rule 206(4)-3 that may exist or arise with respect to Stephens or any of its associated persons. Eric S. Purple Senior Counsel

Incoming Letter:

(202) 508-8060 December 21, 2001 Douglas J. Scheidt, Esq. Associate Director and Chief Counsel Division of Investment Management Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Request for Relief by Stephens Inc. Under the Investment Advisers Act of 1940 Rule 206(4)-3

Dear Mr. Scheidt: Our client, Stephens Inc. ("Stephens") seeks the assurance of the staff of the Division of Investment Management (the "Staff") that Stephens and its "associated persons," as defined in Section 202(a)(17) of the Investment Advisers Act of 1940 ("Advisers Act"), will not be prohibited by Rule 206(4)-3 under the Advisers Act (the "Rule") from receiving cash payments for the solicitation of advisory clients for a registered investment adviser, notwithstanding certain potentially disqualifying events described below. These events do not operate to prohibit or suspend Stephens from acting as, or being associated with, an investment adviser and do not relate to the solicitation of advisory clients. We note in support of this request that the Staff has granted no-action relief to individuals and entities under the Rule in similar circumstances. Stephens is not currently engaged in any solicitation arrangements that would be subject to the Rule. Stephens seeks the requested relief so that Stephens may act as a solicitor in the future. Background

Stephens is an investment banking firm organized under the laws of the State of Arkansas. Headquartered in Little Rock, Arkansas, Stephens is a wholly owned, indirect subsidiary of Stephens Group, Inc. ("SGI"). Stephens is registered with the Securities and Exchange Commission (the "Commission") as an investment adviser under the Advisers Act and as a broker-dealer under the Securities Exchange Act of 1934 (the "Exchange Act"). Stephens engages in municipal underwriting, mergers and acquisitions, corporate underwriting, private placements, discretionary portfolio management, offers a full range of investment banking services and provides distribution and administrative services to investment companies registered under the Investment Company Act of 1940 (the "Investment Company Act"). Events at Issue

1998 Order

In November 1998, Stephens entered into a settlement with the Commission resolving a Commission investigation into the firm's involvement in certain municipal securities offerings by Florida and Georgia issuers. As a condition of the settlement, Stephens consented to the entering against it of an Order Instituting Proceedings, Making Findings and Imposing Remedial Sanctions (the "1998 Order").

3 The Commission found that three former employees of Stephens' Public Finance Department had made undisclosed payments to three Florida public officials for purposes of obtaining or retaining municipal securities business for Stephens and had failed to disclose to a Georgia issuer Stephens' receipt of a brokerage commission on a guaranteed investment contract that Stephens sold to the issuer. The employees were also found to have created false and misleading books and records in an effort to conceal their wrongdoing. The Commission found Stephens, by reason of the misconduct of its former employees and representatives, responsible for violations of Sections 10(b), 15B(c)(1) and 17(a) of, and Rules 10b-5 and 17a-3 under, the Exchange Act, Section 17(a) of the Securities Act of 1933 (the "Securities Act"), and Rules G-8, G-17 and G-20 adopted by the Municipal Securities Rulemaking Board (the "MSRB"). Stephens neither admitted nor denied the Commission's findings in the 1998 Order. The Commission ordered Stephens to: (i) cease and desist from committing or causing any future violation of Sections 10(b), 15B(c)(1) and 17(a) of, and Rules 10b-5 and 17a-3 under, the Exchange Act, Section 17(a) of the Securities Act and MSRB Rules G-8, G-17 and G-20; (ii) pay a civil penalty pursuant to Section 21B of the Exchange Act; (iii) make a payment to the Georgia issuer representing Stephens' profits from the brokerage commission it earned from the sale of the guaranteed investment contract; and (iv) retain an independent consultant to conduct a review of Stephens' supervisory and compliance procedures applicable to its Public Finance Department and to undertake to implement the consultant's recommendations. In anticipation of the issuance of the 1998 Order, Stephens requested a waiver of the potential disqualification caused by the 1998 Order under Regulation E under the Securities Act. Rule 602(e) of Regulation E provides that the Commission may waive the disqualification caused by Rule 602(c)(3) upon a showing of good cause. The Commission determined, based on the representations set forth in Stephens' request for relief, that Stephens had made a showing of good cause, as required by Rule 602(e), and granted Stephens a waiver under Regulation E. 4 Stephens also requested relief from the Commission from the disqualification provisions of Regulations A and D that would have potentially applied to it as a result of the 1998 Order. The Division of Corporation Finance, based on the facts set forth in Stephens' request for relief, found that Stephens had made the showing of good cause required by Rule 262 of Regulation A and Rule 505(b)(2)(iii)(C) of Regulation D and granted the relief requested. 5

1997

Order

In September 1997, Stephens consented to the imposition of a cease-and-desist order (the "1997 Order") by the Commission finding that from January 1, 1994 through September 30, 1995, Stephens violated Section 206(3) of the Advisers Act by effecting principal transactions in securities on behalf of its clients in reliance on "blanket consents" Stephens had obtained at the time the investment advisory agreement between Stephens and the client was entered into. The Commission noted that blanket consents did not satisfy Section 206(3), which requires an investment adviser to obtain the client's consent to each principal transaction before the completion of the transaction. The Commission also found that Stephens had violated Section 204 of the Advisers Act and Rule 204-3(f) under the Advisers Act by failing to file Schedule H of Form ADV and, from October 1994 through August 1996, failing to provide its clients with a disclosure statement containing the information required by Schedule H. 6 Stephens neither admitted nor denied the Commission's findings in the 1997 Order. The Commission ordered Stephens to cease and desist from committing or causing any future violation of Sections 204 and 206(3) of the Advisers Act and Rule 204-3(f) under the Advisers Act. 7

1992 Order

In January 1992, Stephens entered into a settlement with the Commission relating to an investigation by the Commission, the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System relating to the participation by Stephens, as well as approximately 100 other firms, in primary distributions of unsecured debt securities issued by certain government sponsored enterprises. As part of the settlement, Stephens agreed to the entering against it of an Order Making Findings and Imposing Sanctions (the "1992 Order"), 8 in which the Commission found that, in connection with its participation in the distribution of the debt securities, Stephens had made and kept certain records that did not accurately reflect: (i) Stephens' customers' orders for the securities; or (ii) offers, purchases or sales by Stephens of the securities, in violation of Section 17(a) of, and Rules 17a-3 and 17a-4 under, the Exchange Act. Stephens neither admitted nor denied the Commission's findings in the 1992 Order. Stephens was ordered to cease and desist from committing or causing any future violation of Section 17(a) of, and Rules 17a-3 and 17a-4 under, the Exchange Act in connection with any primary distribution of unsecured debt securities issued by government sponsored entities and to pay a civil penalty to the U.S. Treasury. Stephens was also required to develop and maintain policies and procedures reasonably designed to ensure future compliance with the Exchange Act in connection with its distribution of unsecured debt securities issued by government sponsored entities. The 1978 Injunction

On March 18, 1978, SGI, then known as Stephens, Inc., 9 and Jackson T. Stephens 10 consented to the entry of a judgment of permanent injunction (the "Injunction") issued by the U.S. District Court for the District of Columbia in a matter brought by the Commission against SGI and Mr. Stephens, among others. 11 SGI and Mr. Stephens each consented to the Injunction without admitting or denying the Commission's allegations. Under the terms of the Injunction, both SGI and Mr. Stephens were permanently enjoined from failing to file Schedule 13D under Section 13(d) of the Exchange Act with respect to the common stock of Financial General Bankshares, Inc. ("FGB"), or stock of other banks or bank holding companies that are registered under Section 12 of the Exchange Act. SGI and Mr. Stephens were also permanently enjoined from being part of a group that beneficially owns more than five percent of FGB or any other bank or bank holding company stock without SGI having made the filings and taken the actions required by Section 13(d) and from otherwise failing to comply with Section 13(d) and the rules and schedules under Section 13(d). In consenting to the Injunction, SGI undertook to retain counsel experienced in the federal securities laws to advise it in connection with all filings required to be made under Section 13(d) and to implement and maintain procedures designed to prevent further violations of Section 13(d). Subsequent to the issuance of the Injunction, SGI and Stephens instituted a variety of procedures to satisfy this undertaking and ensure compliance by Stephens' employees with the requirements of Section 13(d). In November 1980, Stephens requested relief from the Commission under Rule 262 of Regulation A under the Securities Act to enable it to continue to rely on Regulation A in connection with its offer and distribution of certain securities. Without the relief requested, the exemption from the public offering requirements of the Securities Act provided by Regulation A would have been unavailable to Stephens by reason of the Injunction. The Commission, in granting the relief requested, found that Stephens had made the showing of good cause required by Rule 262 of Regulation A. 12

In November 1999, the Commission granted SGI, Stephens, and Mr. Stephens a permanent exemption under Section 9(c) of the Investment Company Act from Section 9(a) of the Investment Company Act with respect to the Injunction so that Stephens could continue to serve as principal underwriter to certain investment companies registered under the Investment Company Act. 13 In granting relief to Stephens, the Commission considered, among other facts presented in support of the requested relief, that: (i) Stephens had undertaken to develop procedures designed to prevent violations of Section 9(a) by Stephens and its "affiliated persons," as defined in Section 2(a)(3) of the Investment Company Act; (ii) the prohibitions of Section 9(a) would be unduly severe to Stephens' business and employees; (iii) over 20 years had passed since the Injunction; (iv) the Injunction did not involve investment company-related activities; (v) since the Injunction, neither Stephens nor any affiliated person of Stephens had engaged in conduct that would result in disqualification under Section 9(a); and (vi) Stephens had implemented policies and procedures designed to improve its securities law compliance. Legal Analysis

Rule 206(4)-3(a)(1)(ii) prohibits, in part, an investment adviser from paying a cash fee, directly or indirectly, to any solicitor who has been found by the Commission to have engaged in any conduct specified in paragraphs (1), (5) or (6) of Section 203(e) of the Advisers Act, or is subject to an order, judgment or decree described in Section 203(e)(4) of the Advisers Act. Because of the events described above, Stephens may be disqualified from receiving cash payments from an investment adviser for solicitation activities absent action by the Staff, despite the prior relief granted by the Commission in connection with certain of those events pursuant to the rules adopted under Regulations A, D and E of the Securities Act and Section 9(c) of the Investment Company Act. As noted in prior requests by others for relief from the prohibitions of Rule 206(4)-3, the intention of the Commission in adopting paragraph (a) of the Rule was to prevent an investment adviser from hiring as a solicitor a person who could not be hired as an employee, thereby doing indirectly what the adviser could not do directly. 14 In the release proposing the Rule, the Commission stated that "[b]ecause it would be inappropriate for an investment adviser to be permitted to employ indirectly, as a solicitor, someone whom it might not be able to hire as an employee, the Rule prohibits payment of a referral fee to someone who... has engaged in any of the conduct set forth in Section 203(e) of the [Advisers] Act... and therefore could be the subject of a Commission order barring or suspending the right of such person to be associated with an investment adviser." 15 In the release adopting the Rule, the Commission stated that "a finding that a person has engaged in the conduct specified in [Section 203(e) of the Advisers Act] only authorizes and does not require the Commission to bar such persons from being associated with a registered investment adviser. The Commission would entertain, and be prepared to grant in appropriate circumstances, requests for permission to engage as a solicitor a person subject to a statutory bar." 16

For the following reasons, we respectfully submit that the Staff should grant relief to Stephens and its associated persons to engage in solicitation activities. First, the actions described above have not barred, suspended or limited Stephens or its associated persons from acting as an investment adviser or from associating with a registered investment adviser, and the conduct at issue was not related to the solicitation of advisory clients. Stephens conducts its own investment advisory business without any limitations; it would therefore be illogical to prohibit Stephens from receiving cash fees as a solicitor from unaffiliated investment advisers. Second, a substantial amount of time has passed since the occurrence of several of the potentially disqualifying events. The events giving rise to the 1992 Order, for example, occurred more than nine years ago, and the events giving rise to the Injunction occurred more than 23 years ago. Third, as noted above, Stephens has received other exemptions from the Commission in connection with the events described above. The Commission has granted Stephens relief from statutory disqualification pursuant to rules adopted under Regulations A, D, and E of the Securities Act and Section 9(c) of the Investment Company Act. Fourth, Stephens has, in response to the events described above, undertaken a number of measures designed to further enhance its compliance environment, including: (i) hiring an independent consultant to review, report on, and make recommendations regarding Stephens' public finance compliance policies and procedures related to the types of conduct that gave rise to the 1998 Order; (ii) increasing its use of internal audits; and (iii) retaining counsel experienced in the federal securities laws to consult and advise SGI in connection with all filings required to be made pursuant to Section 13(d) of the Exchange Act. In light of these procedures and other prophylactic measures Stephens has instituted, a recurrence of the circumstances giving rise to the events described in this letter is unlikely. Fifth, disqualifying Stephens and its associated persons from receiving cash fees for the solicitation of advisory clients would be unduly and disproportionately severe, considering that the events at issue do not relate to solicitation activities and the extent to which any disqualification would affect Stephens' advisory client solicitation activities. Finally, we submit that permitting Stephens and its associated persons to engage in solicitation activities would not be inconsistent with the public interest, with the purpose of the Rule, or with the Commission's stated policy of taking a flexible approach in applying the Rule's disqualification provision. We submit, therefore, that no reason exists to prohibit Stephens, or its associated persons, from receiving cash fees as a solicitor. In support of this request, we note that the Staff has previously granted no-action relief to others under the
Rule under similar circumstances. See, e.g. ,

The Dreyfus Corporation , SEC No-Action Letter (Mar. 9, 2001); Prudential Securities Inc. , SEC No-Action Letter (Feb. 7, 2001); Tucker Anthony, Inc. , SEC No-Action Letter (Dec. 21, 2000); J.B. Hanauer & Co. , SEC No-Action Letter (Dec. 12, 2000); E-Invest, Inc. , SEC No-Action Letter (Sept. 22, 2000); Credit Suisse First Boston Corp. , SEC No-Action Letter (Aug. 24, 2000); Aeltus Investment Management, Inc. , SEC No-Action Letter (July 17, 2000); William R. Hough & Co. , SEC No-Action Letter (April 13, 2000); BT Alex. Brown Inc. , SEC No-Action Letter (Nov. 17, 1999); NationsBanc Investments, Inc. , SEC No-Action Letter (May 6, 1998); Morgan Keegan & Co., Inc. , SEC No-Action Letter (Jan. 9, 1998); Merrill Lynch, Pierce, Fenner & Smith, Inc. , SEC No-Action Letter (Aug. 7, 1997); Lehman Brothers, Inc. , SEC No-Action Letter (Nov. 12, 1996); Salomon Brothers Inc. , SEC No-Action Letter (Jan. 26, 1994); Kidder, Peabody & Co. Inc. , (Mar. 30, 1992); First City Capital Corp. , SEC No-Action Letter (Feb. 9, 1990). Undertakings

In connection with this request, Stephens undertakes:

(i) to conduct any solicitation arrangement entered into with any investment adviser required to be registered under Section 203 of the Advisers Act in compliance with all applicable provisions of the Rule; (ii) to use its best efforts to ensure that any adviser with which it has a solicitation agreement describes such arrangement to the extent required in response to any applicable item of such adviser's Form ADV; and (iii) to discuss the above-described

actions in any separate written disclosure document required to be delivered by Stephens under the Rule, for a period of ten years from the date of each respective action.

Conclusion

For all of the reasons described above, we respectfully request the Staff to advise us that it will not recommend enforcement action to the Commission if Stephens, or any of its associated persons, receives cash payments for the solicitation of advisory clients from an investment adviser that is required to be registered pursuant to Section 203 of the Advisers Act. * * * * Please call me at (202) 508-8060 or Sarah A. Bessin (202) 508-8058, if you have questions regarding this letter. Very truly yours, Barry P. Barbash BPB/paw cc: Sarah A. Bessin, Esq.

Footnotes

1 Rule 206(4)-3 under the Advisers Act prohibits any investment adviser that is required to be registered under the Advisers Act from paying a cash fee, directly or indirectly, to any solicitor with respect to solicitation activities if, among other things, the solicitor has been found by the Commission to have engaged, or has been convicted of engaging, in any of the conduct specified in Sections 203(e)(1), (5), or (6) of the Advisers Act, or who is subject to an order or judgment described in Section 203(e)(4) of the Advisers Act. 2

In the Matter of Stephens Inc. , File No. 3-9781, Exchange Act Rel. No. 40699 (Nov. 23, 1998); In the Matter of Stephens Inc. , File No. 3-9413, Advisers Act Rel. No. 1666 (Sept. 16, 1997); In the Matter of the Distribution of Securities Issued by Certain Government Sponsored Enterprises , File No. 3-7646, Exchange Act Rel. No. 30249 (Jan. 16, 1992); and SEC v. Bank of Credit and Commerce International, S.A., et. al. , No. 78-0469 (D. DC, Mar. 18, 1978). 3 Exchange Act Release No. 40699 (Nov. 23, 1998). 4 Securities Act Release No. 7613 (Nov. 23, 1998). 5

Stephens Inc. , SEC No-Action Letter (Nov. 23, 1998). 6 Advisers Act Release No. 1666 (Sept. 16, 1997). 7 We note that shortly after the 1997 Order was entered, the Commission issued an interpretive position that clarified that an investment adviser may obtain a client's consent to a principal transaction either prior to the execution of the transaction or after execution but prior to settlement of the transaction. See

Interpretation of Section 206(3) of the Investment Advisers Act of 1940 , Advisers Act Release No. 1732 (July 17, 1998). 8 Exchange Act Release No. 30249 (Jan. 16, 1992). 9 SGI was originally known as "Stephens, Inc." and was registered with the Commission as a broker-dealer under the Exchange Act. Upon the formation of Stephens in 1987, Stephens succeeded to the broker-dealer business of SGI. 10 Jackson T. Stephens served as the chief executive officer and chairman of the board of directors of SGI from 1956 to 1986. He currently serves as chairman of the board of SGI. 11

SEC v. Bank of Credit and Commerce International, S.A. et al. , No. 78-0469 (D. D.C. Mar. 18, 1978) (Final Judgments of Permanent Injunction and Other Equitable Relief as to Stephens, Inc. and Jackson T. Stephens). 12 Letter from George A. Fitzsimmons, Secretary, U.S. Securities and Exchange Commission, to Larry W. Burks, Esq., Friday, Eldredge & Clark (Nov. 17, 1980). 13 Investment Company Act Release No. 23682 (Feb. 5, 1999) (temporary order and notice of application for a permanent order under Section 9(c) of the Investment Company Act of 1940); In re Stephens Group Inc. , Investment Company Act Release No. 23769 (Apr. 2, 1999) (order pursuant to Section 9(c) of the Investment Company Act of 1940 extending a temporary exemption from Section 9(a) of the Act); In re Stephens Group Inc., Investment Company Act Release No. 23935 (Aug. 5, 1999) (order pursuant to Section 9(c) of the Investment Company Act of 1940 extending a temporary exemption from Section 9(a) of the Investment Company Act of 1940); Investment Company Act Release No. 24076 (Oct. 7, 1999) (notice of application pursuant to Section 9(c) of the Investment Company Act of 1940 for a permanent order under Section 9(c) of the Investment Company Act of 1940); In re Stephens Group Inc. , Investment Company Act Release No. 24119 (Nov. 2, 1999) (order pursuant to Section 9(c) of the Investment Company Act of 1940 granting a permanent exemption from Section 9(a) of the Act). 14 Advisers Act Release No. 615 (Feb. 2, 1978) ("Proposing Release"); Advisers Act Release No. 688 (July 12, 1979) ("Adopting Release"). 15 Proposing Release at 5. 16 Adopting Release at n.10.

http://www.sec.gov/divisions/investment/noaction/stephens122701.htm

Home | Previous Page

Modified: 01/29/2002