[Federal Register Volume 64, Number 192 (Tuesday, October 5, 1999)]
[Notices]
[Pages 54058-54061]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-25827]
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SECURITIES AND EXCHANGE COMMISSION
Investment Company Act Release No. 24060; 812-11740]
J.P. Morgan Securities Inc.; Notice of Application
September 29, 1999.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for an order under section 12(d)(1)(J) of
the Investment Company Act of 1940 (the ``Act'') for an exemption from
section 12(d)(1) of the Act, under section 6(c) of the Act for an
exception from section 14(a) of that Act, and under section 17(b) of
the Act for an exemption from section 17(a) of the Act.
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SUMMARY OF APPLICATION: J.P. Morgan Securities Inc. (``J.P. Morgan'')
requests an order with respect to the MEDS trusts (``MEDS Trusts'') \1\
and future trusts that are substantially similar to the MEDS Trusts and
for which J.P. Morgan will serve as a principal underwriter
(collectively, the ``Trusts'') that would (i) permit other registered
investment companies, and companies excepted from the definition of
investment company under section 3(c)(1) or (c)(7) of the Act, to own a
greater percentage of the total outstanding voting stock (the
``Securities'') of any Trust than that permitted by section 12(d)(1),
(ii) exempt the Trusts from the initial net worth requirements of
section 14(a), and (iii) permit the trusts to purchase U.S. government
securities from J.P. Morgan at the time of a Trust's initial issuance
of Securities.
\1\ ``MEDS'' is an acronym for Mandatory Enhanced Dividend
Securities.
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FILING DATES: The application was filed on August 6, 1999. Applicants
have agreed to file an amendment to the application, the substance of
which is reflected in this notice, during the notice period.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing tot he SEC's Secretary and serving J.P.
Morgan with a copy of the request, personally or by mail. Hearing
request should be
[[Page 54059]]
received by the SEC by 5:30 p.m. on October 25, 1999, and should be
accompanied by proof of service on J.P. Morgan, 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 may request notification of
a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC 450 Fifth Street, N.W., Washington, D.C.
20549. Applicant, 60 Wall Street, New York, New York 10260.
FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Staff Attorney, at
(202) 942-0634, or Mary Kay Frech, Branch Chief, at (202) 942-0564
(Division of Investment Management, Office of Investment Company
Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington,
D.C. 20549 (tel. (202) 942-8090).
Applicant's Representation
1. Each Trust will be a limited-life, grantor trust registered
under the Act as a non-diversified, closed-end management investment
company. J.P. Morgan will serve as a principal underwriter (as defined
in section 2(a)(29) of the Act) of the Securities issued to the public
by each Trust.
2. Each Trust will, at the time of its issuance of Securities, (i)
enter into one or more forward purchase contracts (the ``Contracts'')
with a counterparty to purchase a formulaically-determined number of a
specified equity security or securities (the ``Shares'') of one
specified issuer,\2\ and (ii) in some cases, purchase certain U.S.
Treasury securities (``Treasuries''), which may include interest-only
or principal-only securities maturing at or prior to the Trust's
termination. The Trusts will purchase the Contracts from counterparties
that are not affiliated with either the relevant Trust or J.P. Morgan.
The investment objective of each Trust will be to provide to each
holder of Securities (``Holder'') (i) current cash distributions from
the proceeds of any Treasuries, and (ii) participation in, or limited
exposure to, changes in the market value of the underlying Shares.
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\2\ Initially, no Trust will hold Contracts relating to the
Shares of more than one issuer. However, if certain events specified
in the Contracts occur, such as the issuer of Shares spinning-off
securities of another issuer to the holders of the Shares, the Trust
may receive shares of more than one issuer at the termination of the
Contracts.
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3. In all cases, the Shares will trade in the secondary market and
the issuer of the Shares will be a reporting company under the
Securities Exchange Act of 1934. The number of Shares, or the value of
the Shares, that will be delivered to a Trust pursuant to the Contracts
may be fixed (e.g., one Share per Security issued) or may be determined
pursuant to a formula, the product of which will vary with the price of
the Shares. A formula generally will result in each Holder of
Securities receiving fewer Shares as the market value of the Shares
increases, and more Shares as their market value decreases.\3\ At the
termination of each Trust, each Holder will receive the number of
Shares per Security, or the value of the Shares, as determined by the
terms of the Contracts, that is equal to the Holder's pro rata interest
in the Shares or amount received by the Trust under the Contracts.\4\
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\3\ A formula is likely to limit the Holder's participation in
any appreciation of the underlying Shares, and it may, in some
cases, limit the Holder's exposure to any depreciation in the
underlying Shares. It is anticipated that the Holders will receive a
yield greater than the ordinary dividend yield on the Shares at the
time of the issuance of the Securities, which is intended to
compensate Holders for the limit on the Holders' participation in
any appreciation of the underlying Shares. In some cases, there may
be an upper limit on the value of the Shares that a Holder will
ultimately receive.
\4\ The contracts may provide for an option on the part of a
counterparty to deliver Shares, cash, or a combination of Shares and
cash to the Trust at the termination of each Trust.
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4. Securities issued by the Trusts will be listed on a national
securities exchange or traded on the Nasdaq National Market System.
Thus, the Securities will be ``national market system'' securities
subject to public price quotation and trade reporting requirements.
After the Securities are issued, the trading price of the Securities is
expected to vary from time to time based primarily upon the price of
the underlying Shares, interest rates, and other factors affecting
conditions and prices in the debt and equity markets. J.P. Morgan
currently intends, but will not be obligated, to make a market in the
Securities of each Trust.
5. Each Trust will be internally managed by three trustees and will
not have a separate investment adviser. The trustees will have limited
or no power to vary the investments held by each Trust. A bank or banks
qualified to serve as a trustee under the Trust Indenture Act of 1939,
as amended, will act as custodian for each Trust's assets and as
administrator, paying agent, registrar, and transfer agent with respect
to the Securities of each Trust. Any such bank will have no other
affiliation with, and will not be engaged in any other transaction
with, any Trust. The day-to-day administration of each Trust will be
carried out by J.P. Morgan or by the bank.
6. The Trusts will be structured so that the trustees are not
authorized to sell the Contracts or Treasuries under any circumstances
or only upon the occurrence of certain events under a Contract. The
Trusts will hold the Contracts until maturity or any earlier
acceleration, at which time they will be settled according to their
terms. However, in the event of the bankruptcy or insolvency of any
counterparty to a Contract with a Trust, or the occurrence of certain
other events provided for in the Contract, the obligations of the
counterparty under the Contract may be accelerated and the available
proceeds of the Contract will be distributed to the Holders.
7. The trustees of each Trust will be selected initially by J.P.
Morgan, together with any other initial Holders, or by the grantors of
the Trust. The Holders of each Trust will have the right, upon the
declaration in writing or vote of more than two-thirds of the
outstanding Securities of the Trust, to remove a trustee. Holders will
be entitled to a full vote for each Security hold on all matters to be
voted on by Holders and will not be able to cumulate their votes in the
election of trustees. The investment objectives and policies of each
Trust may be changed only with the approval of a ``majority of the
Trust's outstanding Securities'' \5\ or any greater number required by
the Trustee's constituent documents. Unless Holders so request, it is
not expected that the Trusts will hold any meetings of Holders, or that
Holders will ever vote.
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\5\ A ``majority of the Trust's outstanding Securities'' means
the lesser of (i) 67% of the Securities represented at a meeting at
which more than 50% of the outstanding Securities are represented,
and (ii) more than 50% of the outstanding Securities.
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8. The Trusts will not be entitled to any rights with respect to
the Shares until any Contracts requiring delivery of the Shares to the
Trust are settled, at which time the Shares will be promptly
distributed to Holders. The Holders, therefore, will not be entitled to
any rights with respect to the Shares (including voting rights or the
right to receive any dividends or other distributions) until receipt by
them of the Shares at the time the Trust is liquidated.
9. Each Trust's organizational and ongoing expenses will not be
borne by
[[Page 54060]]
the Holders, but rather, directly or indirectly, by J.P. Morgan, the
counterparties, or another third party, as will be described in the
prospectus for the relevant Trust. At the time of the original issuance
of the Securities of any Trust, there will be paid to each of the
administrator, the custodian, and the paying agent, and to each
trustee, a one-time amount in respect of such agent's fee over its
term. Any expenses of the Trust in excess of this anticipated amount
will be paid as incurred by a party other than the Trust itself (which
party may be J.P. Morgan).
10. J.P. Morgan asserts that the investment product offered by the
Trusts serves a valid business purpose. The Trusts, unlike most
registered investment companies, are not marketed to provide investors
with either professional investment asset management or the benefits of
investment in a diversified pool of assets. Rather, J.P. Morgan asserts
that the Securities are intended to provide Holders with an investment
having unique payment and risk characteristics, including an
anticipated higher current yield than the ordinary dividend yield on
the Shares at the time of the issuance of the Securities.
Applicant's Legal Analysis
A. Section 12(d)(1)
1. Section 12(d)(1)(A)(i) of the Act prohibits (i) any registered
investment company from owning in the aggregate more than 3% of the
total outstanding voting stock of any other investment company, and
(ii) any investment company from owning in the aggregate more than 3%
of the total outstanding voting stock of any registered investment
company. A company that is excepted from the definition of investment
company under section 3(c)(1) or (c)(7) of the Act is deemed to be an
investment company for purposes of section 12(d)(1)(A)(i) of the Act
under sections 3(c)(1) and (c)(7)(D) of the Act. Section 12(d)(1)(C) of
the Act similarly prohibits any investment company, other investment
companies having the same investment adviser, and companies controlled
by such investment companies from owning more than 10% of the total
outstanding voting stock of any closed-end investment company.
2. Section 12(d)(1)(J) of the Act provides that the SEC may exempt
persons or transactions from any provision of section 12(d)(1), if, and
to the extent that, the exemption is consistent with the public
interest and protection of investors.
3. J.P. Morgan states that, in order for the Trusts to be marketed
most successfully, and to be treated at a price that most accurately
reflects their value, it is necessary for the Securities of each Trust
to be offered to large investment companies and investment company
complexes. J.P. Morgan states that these investors seek to spread the
fixed costs of analyzing specific investment opportunities by making
sizable investments in those opportunities. Conversely, J.P. Morgan
asserts that it may not be economically rational for the investors, or
their advisers, to take the time to review an investment opportunity if
the amount that the investors would ultimately be permitted to purchase
is immaterial in light of the total asserts of the investment company
or investment company complex. Therefore, J.P. Morgan argues that these
investors should be able to acquire Securities in each Trust in excess
of the limitations imposed by sections 12(d)(1)(A)(i) and 12(d)(1)(C).
J.P. Morgan requests that the SEC issue an order under section
12(d)(1)(J) exempting the Trusts from the limitations.
4. J.P. Morgan states that section 12(d)(1) was designed to prevent
one investment company from buying control of other investment
companies and creating complicated pyramidal structures. J.P. Morgan
also state that section 12(d)(1) was intended to address the laying of
costs to investors.
5. J.P. Morgan asserts that the concerns about pyramiding and undue
influence generally do not arise in the case of the Trusts because
neither the trustees nor the Holders will have the power to vary the
investments held by each Trust or to acquire or dispose of the assets
of the Trusts. To the extent that Holders can change the composition of
the board of trustees or the fundamental policies of each Trust by
vote, J.P. Morgan argues that any concerns regarding undue influence
will be eliminated by a provision in the charter documents of the Trust
that will require any investment companies owning voting stock of any
Trust in excess of the limits imposed by sections 12(d)(1)(i) and
12(d)(1)(C) to vote their Securities in proportion to the votes of all
other Holders. J.R. Morgan also states that the concern about undue
influence through a threat to redeem does not arise in the case of the
Trusts because the Securities will not be redeemable.
6. Section 12(d)(1) also was designed to address the excessive
costs and fees that may result from multiple layers of investment
companies. J.P. Morgan states that these concerns do not arise in the
case of the Trusts because of the limited ongoing fees and expenses
incurred by the Trusts and because generally these fees and expenses
will be borne, directly or indirectly, by J.P. Morgan or another third
party, not by the Holders. In addition, the Holders will not, as a
practical matter, bear the organizational expenses (including
underwriting expenses) of the Trusts. J.P. Morgan asserts that the
organizational expenses effectively will be borne by the counterparties
in the form of a discount in the price paid to them for the Contracts,
or will be borne directly by J.P. Morgan, the counterparties, or other
third parties. Thus, a Holder will not pay duplicative charges to
purchase securities in any Trust. Finally, there will be no duplication
of advisory fees because the Trusts will be internally managed by their
trustees.
b. Section 14(a)
1. Section 14(a) of the Act requires, in pertinent part, that an
investment company have a net worth of at least $100,000 before making
any public offering of its shares. The purpose of section 14(a) is to
ensure that investment companies are adequately capitalized prior to or
simultaneously with the sale of their securities to the public. Rule
14a-3 exempts from section 14(a) unit investment trusts (``UITs'') that
meet certain conditions in recognition of the fact that, once the units
are sold, a UIT requires much less commitment on the part of the
sponsor than does a management investment company. Rule 14a-3 provides
that a UIT investing in eligible trust securities shall be exempt from
the net worth requirement, provided that the trust holds at least
$100,000 of eligible trust securities at the commencement of a public
offering.
2. Section 6(c) of the Act provides that the SEC may exempt persons
or transactions if, and to the extent that, the exemption is necessary
or appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the policy
and provisions of the Act.
3. J.P. Morgan requests an order under section 6(c) exempting the
Trusts from the requirements of section 14(a). J.P. Morgan believes
that the exemption is appropriate in the public interest and consistent
with the protection of investors and the policies and provisions of the
Act. J.P. Morgan asserts that, while the Trusts are classified as
management companies, they have the characteristics of UITs. Investors
in the Trusts, like investors in a UIT, will not be purchasing
interests
[[Page 54061]]
in a managed pool of securities, but rather in a fixed and disclosed
portfolio that is held until maturity. J.P. Morgan believes therefore,
that there is no need for an ongoing commitment on the part of the
underwriter.
4. J.P. Morgan states that, in order to ensure that each Trust will
become a going concern, the Securities of each Trust will be publicly
offered in a firm commitment underwriting, registered under the
Securities Act of 1933, resulting in net proceeds to each Trust of at
least $10,000,000. Prior to the issuance and delivery of the Securities
of each Trust to the underwriters, the underwriters will enter into an
underwriting agreement pursuant to which they will agree to purchase
the Securities subject to customary conditions to closing. The
underwriters will not be entitled to purchase less than all of the
Securities of each Trust. Accordingly, J.P. Morgan states that either
the offering will not be completed at all or each Trust will have a net
worth substantially in excess of $100,000 on the date of the issuance
of the Securities. J.P. Morgan also does not anticipate that the net
worth of the Trusts will fall below $100,000 before they are
terminated.
C. Section 17(a)
1. Sections 17(a)(1) and (2) of the Act generally prohibit the
principal underwriter, or any affiliated person of the principal
underwriter, of a registered investment company from selling or
purchasing any securities to or from that investment company. The
result of these provisions is to preclude the Trusts from purchasing
Treasuries from J.P. Morgan.
2. Section 17(b) of the Act provides that the SEC shall exempt a
proposed transaction from section 17(a) if evidence establishes that
the terms of the proposed transaction are reasonable and fair and do
not involve overreaching, and the proposed transaction is consistent
with the policies of the registered investment company involved and the
purposes of the Act. J.P. Morgan requests an exemption from sections
1(a)(1) and (2) to permit the Trusts to purchase Treasuries from J.P.
Morgan.
3. J.P. Morgan states that the policy rationale underlying section
17(a) is the concern that an affiliated person of an investment
company, by virtue of this relationship, could cause the investment
company to purchase securities of poor quality from the affiliated
person or to overpay for securities. J.P. Morgan argues that it is
unlikely that it would be able to exercise any adverse influence over
the Trusts with respect to purchases of Treasuries because Treasuries
do not vary in quality and are traded in one of the most liquid markets
in the world. Treasuries are available through both primary and
secondary dealers, making the Treasury market very competitive. In
addition, market prices on Treasuries can be confirmed on a number of
commercially available information screens. J.P. Morgan argues that
because it is one of a limited number of primary dealers in Treasuries,
it will be able to offer the Trusts prompt execution of their Treasury
purchases at very competitive prices.
4. J.P. Morgan states that it is only seeking relief from section
17(a) with respect to the initial purchase of the Treasuries and not
with respect to an ongoing course of business. Consequently, investors
will know before they purchase a Trust's Securities the Treasuries that
will be owned by the Trust and the amount of the cash payments that
will be provided periodically by the Treasuries to the Trust and
distributed to Holders. J.P. Morgan also asserts that whatever risk
there is of overpricing the Treasuries will be borne by the
counterparties and not by the Holders because the cost of the
Treasuries will be calculated into the amount paid on the Contracts.
J.P. Morgan argues that, for this reason, the counterparties will have
a strong incentive to monitor the price paid for the Treasuries,
because any overpayment could result in a reduction in the amount that
they would be paid on the Contracts.
Applicant's Conditions
J.P. Morgan agrees that the order granting the requested relief
will be subject to the following conditions:
1. Any investment company owning voting stock of any Trust in
excess of the limits imposed by section 12(d)(1) of the Act will be
required by the Trust's charter documents, or will undertake, to vote
its Trust shares in proportion to the vote of all other Holders.
2. The trustees of each Trust, including a majority of the trustees
who are not interested persons of the Trust, (i) will adopt procedures
that are reasonably designed to provide that the conditions set forth
below have been complied with; (ii) will make and approve such changes
as are deemed necessary; and (iii) will determine that the transactions
made pursuant to the order were effected in compliance with such
procedures.
3. The Trusts (i) will maintain and preserve in an easily
accessible place a written copy of the procedures (and any
modifications to the procedures), and (ii) will maintain and preserve
for the longer of (a) the life of the Trusts and (b) six years
following the purchase of any Treasuries, the first two years in an
easily accessible place, a written record of all Treasuries purchased,
whether or not from J.P. Morgan, setting forth a description of the
Treasuries purchased, the identity of the seller, the terms of the
purchase, and the information or materials upon which the
determinations described below were made.
4. The Treasuries to be purchased by each Trust will be sufficient
to provide payments to Holders of Securities that are consistent with
the investment objectives and policies of the Trust as recited in the
Trust's registration statement and will be consistent with the
interests of the Trust and the Holders of its Securities.
5. The terms of the transactions will be reasonable and fair to the
Holders of the Securities issued by each Trust and will not involve
overreaching of the Trust or the Holders of Securities of the Trust on
the part of any person concerned.
6. The fee, spread, or other remuneration to be received by J.P.
Morgan will be reasonable and fair compared to the fee, spread, or
other remuneration received by dealers in connection with comparable
transactions at such time, and will comply with section 17(e)(2)(C) of
the Act.
7. Before any Treasuries are purchased by the Trust, the Trust must
obtain such available market information as it deems necessary to
determine that the price to be paid for, and the terms of, the
transaction are at least as favorable as that available from other
sources. This will include the Trust obtaining and documenting the
competitive indications with respect to the specific proposed
transaction from two other independent government securities dealers.
Competitive quotation information must include price and settlement
terms. These dealers must be those who, in the experience of the
Trust's trustees, have demonstrated the consistent ability to provide
professional execution of Treasury transactions at competitive market
prices. They also must be those who are in a position to quote
favorable prices.
For the SEC, by the Division of Investment Management, pursuant
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-25827 Filed 10-4-99; 8:45 am]
BILLING CODE 8010-01-M
