Tuesday, March 18, 2008

SEC Details Staff's Involvement in Bear Stearns Transaction

During discussions of the Bear Stearns/JPMorgan Chase transaction, SEC officials were in close contact with Federal Reserve Board officials, as well as with representatives of the firms involved. To assist in advancing a possible transaction, the SEC staff able provided several letters clarifying the staff’s position on certain matters connected with the merger.

The SEC also assured that, despite the loss in market value in Bear Stearns’ stock, and independent of the transaction, many protections remain in place for customers of Bear Stearns’ broker-dealers. According to Bear Stearns’ reports to the SEC, the firm’s broker-dealers were in compliance with the SEC’s capital and customer protection rules

The Division of Trading and Markets wrote a letter addressing the timing of JPMorgan’s filing of a Form BD with the SEC. Form BD is required to be filed promptly after a registered broker-dealer is acquired by another firm. The staff’s letter states that it would be acceptable if JPMorgan filed a completed Form BD a reasonable period after the merger closes.

The Division of Investment Management wrote two letters concerning issues under the Investment Company Act and Investment Advisers Act arising out of the change in control of investment advisers affiliated with Bear Stearns. One letter addresses approvals by the mutual funds advised by the Bear Stearns advisers of new advisory contracts between the funds and the advisers. The other letter provides temporary, conditional relief from restrictions on principal transactions between the Bear Stearns advisers and clients of investment advisers affiliated with JP Morgan and transactions between the JP Morgan advisers and clients of the Bear Stearns advisers.

The Division of Enforcement wrote a letter declining to provide assurances about possible future enforcement actions. The letter stated that reaching conclusions about those inquiries would be premature. In the letter, the Division confirmed that, consistent with prior statements and guidance by the SEC, the staff would favorably take into account the circumstances of the JPMorgan acquisition of Bear Stearns when considering whether to recommend enforcement action against JPMorgan arising out of statements made by Bear Stearns in the 60 days before the public announcement of the merger.

The Division of Corporation Finance wrote a letter addressing sales by client accounts managed by JPMorgan and Bear Stearns of the other firm’s securities, in view of the control relationship created by the merger agreement. The letter states that these sales may occur temporarily without registration under the Securities Act or compliance with Securities Act Rule 144 in certain limited circumstances.

Finally, the SEC emphasized that capital is not synonymous with liquidity. A firm can be highly capitalized, that is, can have more assets than liabilities, but can have liquidity problems if the assets cannot quickly be sold for cash or alternative sources of liquidity, including credit, obtained to meet other demands. While the ability of a securities firm to withstand market, credit, and other types of stress events is linked to the amount of capital the firm possesses, the firm also needs sufficient liquid assets, such as cash and U.S. Treasury securities, to meet its financial obligations as they arise.

Accordingly, large securities firms must maintain a minimum level of liquidity in the holding company. This liquidity is intended to address pressing needs for funds across the firm. This liquidity consists of cash and highly liquid securities for the parent company to use without restriction.