Document ID: SEC-2007-0032-0001
Agency: sec
Document Type: Notice
Title: FBR Fund Advisers, Inc., et al.; Notice of Application
Posted Date: 2007-01-09T05:00Z

[Federal Register: January 9, 2007 (Volume 72, Number 5)]
[Notices]               
[Page 1034-1036]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09ja07-71]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-27652; 812-13351]

 
FBR Fund Advisers, Inc., et al.; Notice of Application

December 29, 2006.
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 (the ``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 Friedman, Billings, Ramsey & Co., Inc. 
(``FBR & Co.'') on or about December 22, 2006 by the United States 
District Court for the District of Columbia, until the Commission takes 
final action on an application for a permanent order. Applicants also 
have applied for a permanent order.

APPLICANTS: FBR Fund Advisers, Inc. (``FBR Advisers''), FBR Investment 
Services, Inc. (``FBRIS''), and FBR Investment Management, Inc. 
(``FBRIM'') (collectively, 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 FBR & Co. is or 
becomes an affiliated person, other than any company of which 
Emanual J. Friedman is or becomes an affiliated person (together 
with Applicants, ``Covered Persons'').

FILING DATE: The application was filed on December 22, 2006. Applicants 
have agreed to file a final amendment during the notice period, the 
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substance of which is reflected in this notice.

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 23, 2007, 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, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-1090. Applicants, c/o William 
Ginivan, General Counsel, Friedman, Billings, Ramsey Group, Inc., 
Potomac Tower, 1001 Nineteenth Street North, Arlington, VA 22209.

FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Senior Counsel, at (202) 
551-6813, or Mary Kay Frech, Branch Chief, at (202) 551-6821 (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, 100 F Street, 
NE., Washington, DC 20549-0102 (tel. 202-551-5850).

Applicants' Representations

    1. FBR Advisers, FBRIS, and FBRIM are wholly-owned subsidiaries of 
Friedman, Billings, Ramsey Group, Inc. (``FBR''). FBR, a Virginia 
corporation, is a diversified financial services holding company that 
engages in investment banking, institutional brokerage and asset 
management services, among other activities. FBR Advisers, an 
investment adviser registered under the Investment Advisers Act of 1940 
(``Advisers Act''), serves as investment adviser to certain series of 
FBR Funds (the ``Funds''), an open-end management investment company 
organized as a Delaware statutory trust and registered under the Act. 
FBRIS, a broker-dealer registered under the Securities Exchange Act of 
1934 (``Exchange Act''), serves as principal underwriter and 
distributor of shares of the Funds. FBRIM, an investment adviser 
registered under the Advisers Act, serves as investment adviser to 
certain employees' securities companies (``ESCs''), as defined in 
section 2(a)(13) of the Act, which are

[[Page 1035]]

investment vehicles formed for the benefit of employees of FBR and its 
affiliates.
    2. On or about December 22, 2006, the United States District Court 
for the District of Columbia entered a final judgment against FBR & 
Co., a broker-dealer registered under the Exchange Act, in a matter 
brought by the Commission (the ``Final Judgment'').\2\ FBR & Co. is a 
wholly-owned subsidiary of FBR. The Commission alleged in the complaint 
(``Complaint'') that, in connection with a Private Investment in Public 
Equity offering of stock by CompuDyne Corporation, for which FBR & Co. 
served as placement agent, FBR & Co. failed to establish, maintain and 
enforce policies and procedures reasonably designed to prevent the 
misuse of material, nonpublic information, unlawfully traded while 
aware of material nonpublic information and conducted unregistered 
sales of securities. One of the individuals alleged to have been 
involved in the conduct underlying the Complaint is Emanuel J. 
Friedman, the former co-chairman and co-chief executive officer of FBR, 
former chairman and co-chief executive officer of FBR & Co., and former 
chairman and co-chief executive officer of FBRIM. Without admitting or 
denying any of the allegations in the Complaint, except as to 
jurisdiction, FBR & Co. consented to the entry of the Final Judgment. 
The Final Judgment permanently restrains and enjoins FBR & Co., and its 
agents, servants, employees, and attorneys, from violating sections 
10(b) and 15(f) of the Exchange Act and rule 10b-5 thereunder and 
sections 5 and 17(a) of the Securities Act of 1933 (``Securities Act'') 
(the ``Injunction'').\3\ FBR & Co. also consented to the payment of 
disgorgement plus prejudgment interest in addition to civil penalties 
in an aggregate amount of approximately $3.7 million.\4\
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    \2\ Securities and Exchange Commission v. Friedman, Billings, 
Ramsey & Co., Inc., et al., Final Judgment as to Friedman, Billings, 
Ramsey & Co., Inc., 06-CV-02160 (RCL) (D.D.C., filed Dec. 22, 2006).
    \3\ The Final Judgment also enjoins Mr. Friedman from violating 
section 5 of the Securities Act and, as a controlling person 
pursuant to section 20(a) of the Exchange Act, from violating 
sections 10(b) and 15(f) of the Exchange Act and rule 10b-5 
thereunder. The Final Judgment also imposes civil penalties on Mr. 
Friedman. Mr. Friedman is an affiliated person of FBR under section 
2(a)(3)(A) of the Act by virtue of his ownership of 6.09% of the 
outstanding voting securities of FBR. The requested temporary and 
permanent orders will not apply to Mr. Friedman or to any company of 
which Mr. Friedman is or becomes an affiliated person, which 
currently includes FBR.
    \4\ FBR & Co. also has agreed to certain undertakings designed 
to ensure that it does not commit future violations with respect to 
the misuse of material nonpublic information.
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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 unit investment 
trust 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). ``Affiliated person'' is defined in 
section 2(a)(3) of the Act to include any person directly or indirectly 
controlling, controlled by, or under common control with, the other 
person. Applicants state that FBR & Co. is an affiliated person of each 
of the Applicants within the meaning of section 2(a)(3) of the Act 
because FBR controls FBR & Co., FBR Advisers, FBRIS and FBRIM. 
Applicants state that, as a result of the Injunction, they would be 
subject to the prohibitions of section 9(a).
    2. Section 9(c) of the Act provides that the Commission shall grant 
an application for an exemption from the disqualification provisions of 
section 9(a) of the Act if it is established that these provisions, as 
applied to the applicants, are unduly or disproportionately severe or 
that the conduct of the applicants has been such as not to make it 
against the public interest or protection of investors to grant the 
exemption. 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 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 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 although Mr. Friedman was co-chairman and 
co-chief executive officer of FBR, co-chairman and co-chief executive 
officer of FBRIM and also participated in the conduct described in the 
Injunction, Mr. Friedman is no longer employed by FBR, FBRIM or FBR & 
Co. Applicants also state that none of their officers, directors or 
employees who are engaged in the provision of investment advisory or 
underwriting services to the Funds or investment advisory services to 
the ESCs participated in any way in the conduct underlying the 
Injunction. Applicants further state that the conduct underlying the 
Injunction did not involve any Funds or ESCs.
    5. Applicants state that the inability to continue providing 
advisory and underwriting services to the Funds would result in 
potentially severe hardships for the Funds and their shareholders. 
Applicants also state that they have distributed, or will distribute as 
soon as reasonably practicable, written materials, including an offer 
to meet in person to discuss the materials, to the boards of directors 
or trustees of the Funds (the ``Boards''), including the directors who 
are not ``interested persons,'' as defined in section 2(a)(19) of the 
Act, of such Funds and their independent legal counsel, as defined in 
rule 0-1(a)(6) under the Act, if any, regarding the Injunction, any 
impact on the Funds, and the application. Applicants will provide the 
Boards with all information concerning the Injunction and the 
application that is necessary for the Funds to fulfill their disclosure 
and other obligations under the federal securities laws.
    6. Applicants also assert that, if they were barred from providing 
services to the Funds, the effect on their businesses and employees 
would be severe. Applicants state that they have committed substantial 
resources to establish an expertise in underwriting and advising the 
Funds. The Applicants have never before received an exemptive order 
under section 9(c).
    7. Applicants further state that prohibiting FBRIM from continuing 
to serve as investment adviser to the ESCs is not in the public 
interest or in furtherance of the protection of investors. Because the 
ESCs relate to employee retention and compensation matters and are 
sponsored for employees of FBR and its affiliates, it would not be 
consistent with the purposes of the employees' securities company 
provisions of the Act to require another entity not affiliated with FBR 
to serve as investment adviser to the ESCs. In addition, the 
participating employees have agreed to participate in the ESCs with the 
expectation that the ESCs will be managed by their employer.

[[Page 1036]]

Applicants' Condition

    Applicants agree that any order granting the requested relief shall 
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, 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 exemption 
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 Covered Persons are granted a temporary exemption from 
the provisions of section 9(a), effective as of the date of the 
Injunction, solely with respect to the Injunction, subject to the 
condition in the application, until the date the Commission takes final 
action on an application for a permanent order.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E7-60 Filed 1-8-07; 8:45 am]

BILLING CODE 8011-01-P