81 FR 89999 - Stifel, Nicolaus & Company, Inc., et al.; Notice of Application and Temporary Order

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 239 (December 13, 2016)

[Federal Register Volume 81, Number 239 (Tuesday, December 13, 2016)]
[Notices]
[Pages 89999-90001]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-29793]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-32379; File No. 812-14721]


Stifel, Nicolaus & Company, Inc., et al.; Notice of Application 
and Temporary Order

December 6, 2016.
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 
(``Temporary Order'') exempting them from section 9(a) of the Act, with 
respect to an injunction entered against Stifel, Nicolaus & Company, 
Inc. (``Stifel Nicolaus'') on December 6, 2016 by the United States 
District Court for the Eastern District of Wisconsin (``Court''), in 
connection with a consent order between Stifel Nicolaus and the 
Commission, until the Commission takes final action on an application 
for a permanent order (the ``Permanent Order,'' and with the Temporary 
Order, the ``Orders''). Applicants also have applied for a Permanent 
Order.

Applicants: Stifel Nicolaus, Choice Financial Partners, Inc. 
(``Choice''), 1919 Investment Counsel, LLC (``1919ic''), and Ziegler 
Capital Management, LLC (``ZCM'') (each an ``Applicant'' and 
collectively, the ``Applicants'').

Filing Date: The application was filed on December 6, 2016.

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 January 3, 2017, and should be accompanied by proof of service 
on Applicants, in the form of an affidavit, or for lawyers, a 
certificate of service. Pursuant to rule 0-5 under the Act, hearing 
requests should state the nature of the writer's interest, any facts 
bearing upon the desirability of a hearing on the matter, 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, U.S. Securities and Exchange Commission, 100 F 
Street NE., Washington, DC 20549-1090; Applicants: Stifel Nicolaus and 
Choice: One Financial Plaza, 501 North Broadway, St. Louis, MO 63102; 
1919ic: One South Street, Suite 2500, Baltimore, MD 21202; ZCM: 70 West 
Madison Street, Suite 2400, Chicago, IL 60602.

FOR FURTHER INFORMATION CONTACT:  Kay-Mario Vobis, Senior Counsel, 
Vanessa Meeks, Senior Counsel, or Parisa Haghshenas, Branch Chief, at 
(202) 551-6821 (Division of Investment Management, Chief Counsel's 
Office).

SUPPLEMENTARY INFORMATION: The following is a temporary order and a 
summary of the application. The complete application may be obtained 
via the Commission's Web site by searching for the file number, or an 
applicant using the Company name box, at http://www.sec.gov/search/search.htm, or by calling (202) 551-8090.

Applicants' Representations

    1. Stifel Nicolaus, a Missouri corporation, is a broker-dealer 
registered under the Securities Exchange Act of 1934 (the ``Exchange 
Act'') and an investment adviser registered under the Investment 
Advisers Act of 1940 (the ``Advisers Act''). Stifel Nicolaus is a 
wholly-owned subsidiary of Stifel Financial Corp. (``Stifel 
Financial''), a Delaware corporation. Stifel Financial is the ultimate 
parent company of each of the Applicants.
    2. Choice, 1919ic, and ZCM are each a wholly-owned subsidiary of 
Stifel Financial and are each an investment adviser registered under 
the Advisers Act. Choice, a Missouri corporation, was organized in 
early 2007. 1919ic, a Maryland limited liability company, was acquired 
by Stifel Financial in 2014. ZCM, a Wisconsin limited liability 
company, was acquired by Stifel Financial in 2013. Choice, 1919ic, and 
ZCM each serve as investment adviser or investment sub-adviser to 
investment companies registered under the Act, or series of such 
companies (each a ``Fund'') and are collectively referred to as the 
``Fund Servicing Applicants.''
    3. While no existing company of which Stifel Nicolaus is an 
affiliated person within the meaning of section 2(a)(3) of the Act 
(``Affiliated Person''), other than the Fund Servicing Applicants, 
currently serves as an investment adviser or depositor of any Fund, 
employees' securities company (``ESC'') or investment company that has 
elected to be treated as a business development company under the Act 
(``BDC''), or as a principal underwriter (as defined in section 
2(a)(29) of the Act) for any open-end management investment company 
registered under the Act (``Open-End Fund''), unit investment trust 
registered under the Act (``UIT''), or face-amount certificate company 
registered under the Act (``FACC'') (such activities, ``Fund Servicing 
Activities''), Applicants request that any relief granted also apply to 
any existing company of which Stifel Nicolaus is an Affiliated Person 
and to any other company of which Stifel Nicolaus may become an 
Affiliated Person in the future (together with the Fund Servicing 
Applicants, the ``Covered Persons'') \1\ with respect to

[[Page 90000]]

any activity contemplated by section 9(a) of the Act.
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    \1\ Stifel Nicolaus is a party to the application, but does not 
currently engage in, and will not engage in, any Fund Servicing 
Activities, and is not a Covered Person.
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    4. On August 10, 2011, the Commission filed a complaint, and on 
October 5, 2012, an amended complaint which superseded the original 
complaint (the ``Complaint'') in the Court captioned SEC v. Stifel 
Nicolaus & Co., Inc., et al. (the ``Action'').\2\ The Complaint alleged 
that in 2006, Stifel Nicolaus and David W. Noack, a Senior Vice 
President of Stifel Nicolaus and head of its Milwaukee office 
(``Noack''), violated the federal securities laws in connection with 
their recommendations that five school districts in eastern Wisconsin 
(the ``School Districts'') invest their own funds, together with funds 
borrowed by specially-created trusts (the ``OPEB Trusts''), in certain 
synthetic collateralized debt obligations (the ``CDO Investments'') in 
order to cover other post-employment benefits. In the aggregate, the 
School Districts invested their own funds--plus funds borrowed from 
Depfa Bank, plc (``Depfa Bank'')--for an aggregate $200 million of 
investments in the CDO Investments. In 2008, one of the School 
Districts contributed an additional $10 million to fund a collateral 
shortfall to Depfa Bank. The investments failed and the School 
Districts suffered a complete loss of their cash investment of $47.3 
million in the aggregate.
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    \2\ SEC v. Stifel Nicolaus & Co., Inc., et al., Case No. 11-CV-
755 (E.D. Wis.) (Aug. 10, 2011).
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    5. Stifel Nicolaus, Noack and the staff of the Division of 
Enforcement at the Commission have reached an agreement to settle the 
Action. As part of the agreement, the parties have submitted a consent 
of Defendant Stifel Nicolaus (the ``Consent'') that contains certain 
admitted facts and a form of a Final Judgment as to Defendants Stifel 
Nicolaus and Noack (the ``Final Judgment''),\3\ which has been entered 
by the Court. According to the Final Judgment, Stifel Nicolaus and 
Noack acted negligently by making material misstatements and omissions 
to the School Districts and by failing adequately to investigate the 
appropriateness of the CDO Investments and, further, that by engaging 
in those acts and admissions, Stifel Nicolaus and Noack violated the 
federal securities laws. The Final Judgment provides that Stifel 
Nicolaus and Noack are permanently restrained and enjoined from 
violating, directly or indirectly, sections 17(a)(2) and 17(a)(3) of 
the Securities Act of 1933 (the ``Injunction''). The Final Judgment 
provides for joint and several liability for disgorgement of $1.66 
million plus prejudgment interest in the amount of $840,000 and civil 
penalties in the amount of $22 million against Stifel Nicolaus and 
$100,000 against Noack.
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    \3\ SEC v. Stifel Nicolaus & Co., Inc., et al., Case No. 11-CV-
755 (E.D. Wis.) (Dec. 6, 2016).
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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, or in 
connection with activities as an underwriter, broker or dealer, from 
acting, among other things, as an investment adviser or depositor of 
any registered investment company or a principal underwriter for any 
Open-End Fund, UIT or FACC. 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, among others, any person directly or indirectly controlling, 
controlled by, or under common control with, the other person. 
Applicants state that, taken together, sections 9(a)(2) and 9(a)(3) 
have the effect of precluding the Fund Servicing Applicants and Covered 
Persons from engaging in Fund Servicing Activities upon the entry of 
the Injunction against Stifel Nicolaus because Stifel Nicolaus is an 
Affiliated Person of each Fund Servicing Applicant and Covered Person.
    2. Section 9(c) of the Act provides that, upon application, the 
Commission shall by order grant an exemption from the disqualification 
provisions of section 9(a) of the Act, either unconditionally or on an 
appropriate temporary or other conditional basis, to any person if that 
person establishes that: (a) The prohibitions of section 9(a), as 
applied to the person, are unduly or disproportionately severe or (b) 
the conduct of the person has been such as not to make it against the 
public interest or the protection of investors to grant the exemption. 
Applicants have filed an application pursuant to section 9(c) seeking a 
Temporary Order and a Permanent Order exempting the Fund Servicing 
Applicants and other Covered Persons from the disqualification 
provisions of section 9(a) of the Act. The Fund Servicing Applicants 
and other Covered Persons may, if the relief is granted, in the future 
act in any of the capacities contemplated by section 9(a) of the Act 
subject to the applicable terms and conditions of the Orders.
    3. Applicants believe they meet the standards 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 not been such as 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 described in the factual 
admissions contained in the Final Judgment (the ``Conduct'') did not 
involve any of the Fund Servicing Applicants performing Fund Servicing 
Activities or otherwise. Applicants also state that the Conduct did not 
involve any Fund with respect to which the Fund Servicing Applicants 
engaged in Fund Servicing Activities or their respective assets. In 
addition, Applicants state that the Conduct occurred from no earlier 
than late 2005 through the end of 2006 (the ``Period''). Applicants 
note that all the Fund Servicing Applicants were acquired or began 
activities (including Fund Servicing Activities) after the Period had 
concluded.
    5. Applicants state that: (i) None of the current or former 
directors, officers or employees of the Fund Servicing Applicants had 
any involvement in the Conduct; (ii) the personnel who were involved in 
the Conduct (or who may be subsequently identified by the Applicants as 
having been responsible for or involved in the Conduct) have had no, 
and will not have any, involvement in providing Fund Servicing 
Activities and will not serve as an officer, director, or employee of 
any Covered Person providing Fund Servicing Activities; and (iii) 
because the personnel of the Fund Servicing Applicants did not have any 
involvement in the Conduct, shareholders of Funds were not affected any 
differently than if those Funds had received services from any other 
non-affiliated investment adviser or sub-adviser.
    6. Applicants submit that applying section 9(a) to bar the Fund 
Servicing Applicants or other Covered Persons, who were not involved in 
the Conduct, from serving Funds and their shareholders in the absence 
of improper practices relating to their Fund Servicing Activities would 
be unduly or disproportionately severe. Applicants state that the 
section 9(a) disqualification could result in substantial costs to the 
Funds to which the Fund Servicing Applicants provide investment 
advisory services, and such Funds' operations would be disrupted, as 
they sought to engage new advisers or sub-advisers. Applicants assert 
that these effects would be unduly severe given the Fund Servicing 
Applicants' lack of involvement in the Conduct. Moreover, Applicants 
state that Stifel

[[Page 90001]]

Nicolaus has taken remedial actions to address the Conduct, as outlined 
in the application. Thus, Applicants believe that granting the 
exemption from section 9(a), as requested, would be consistent with the 
public interest and the protection of investors.
    7. Applicants state that the inability of the Fund Servicing 
Applicants to continue to provide investment advisory services to Funds 
would result in those Funds and their shareholders facing unduly and 
disproportionately severe hardships. Applicants assert that uncertainty 
caused by prohibiting the Fund Servicing Applicants from continuing to 
serve the Funds in an advisory capacity would disrupt investment 
strategies and could result in significant net redemptions of shares of 
the Funds, which would frustrate efforts to manage effectively the 
Funds' assets and could increase the Funds' expense ratios to the 
detriment of non-redeeming shareholders. In addition, although a 
suitable successor investment adviser or sub-adviser could replace the 
Fund Servicing Applicants, Applicants state that disqualifying the Fund 
Servicing Applicants could result in substantial costs to the Funds and 
others because of the need to obtain shareholder approvals of new 
investment advisory agreements with the new adviser or sub-adviser.
    8. Applicants state that if the Fund Servicing Applicants were 
barred under section 9(a) of the Act from engaging in Fund Servicing 
Activities, and were unable to obtain the requested exemption, the 
effect on their businesses and employees would be unduly and 
disproportionately severe because they have committed substantial 
capital and other resources to establishing an expertise in advising 
the Funds. Applicants further state that prohibiting the Fund Servicing 
Applicants from engaging in Fund Servicing Activities would not only 
adversely affect their businesses, but would also adversely affect 
their employees who are involved in those activities. Applicants state 
that the vast majority of these employees working for the Fund 
Servicing Applicants were not part of the Stifel Financial organization 
until after the Conduct had concluded in 2006. Applicants state that 
many of these employees would likely seek alternative employment and 
would encounter significant difficulty and/or delay in doing so.
    9. Applicants state that they will distribute to the boards of 
trustees of the Funds (the ``Boards'') written materials describing the 
circumstances that led to the Injunction and any impact on the Funds, 
and the application. The written materials will include an offer to 
discuss the materials at an in-person meeting with each Board of the 
Fund, including the directors who are not ``interested persons'' of 
such Funds as defined in section 2(a)(19) of the Act, and their 
independent legal counsel as defined in rule 0-1(a)(6) under the Act. 
Applicants state they will provide the Boards with the information 
concerning the Injunction and the application that is necessary for 
those Funds to fulfill their disclosure and other obligations under the 
federal securities laws and will provide them a copy of the Final 
Judgment entered by the Court.
    10. Applicants state that none of the Applicants has previously 
applied for an exemptive order under section 9(c) of the Act.

Applicants' Conditions

    Applicants agree that any order granted by the Commission pursuant 
to the application will be subject to the following conditions:
    1. 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, Covered Persons, 
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.
    2. Each Applicant and Covered Person will adopt and implement 
policies and procedures reasonably designed to ensure that it will 
comply with the terms and conditions of the Orders within 60 days of 
the date of the Permanent Order.
    3. Stifel Nicolaus will comply with the terms and conditions of the 
Consent.
    4. Applicants will provide written notification to the Chief 
Counsel of the Commission's Division of Investment Management with a 
copy to the Chief Counsel of the Commission's Division of Enforcement 
of a material violation of the terms and conditions of the Orders and 
Consent within 30 days of discovery of the material violation.

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 
Fund Servicing Applicants and any other Covered Persons are granted a 
temporary exemption from the provisions of section 9(a), solely with 
respect to the Injunction, subject to the representations and 
conditions in the application, from December 6, 2016, until the 
Commission takes final action on their application for a permanent 
order.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2016-29793 Filed 12-12-16; 8:45 am]
 BILLING CODE 8011-01-P