[Federal Register Volume 62, Number 193 (Monday, October 6, 1997)]
[Notices]
[Pages 52166-52169]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26399]
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SECURITIES AND EXCHANGE COMMISSION
[REl. No. IC-22837; 812-10802]
Salomon Brothers Inc; Notice of Application
September 30, 1997.
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), under section 6(c) of the Act for an exemption from
section 14(a), 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: Salomon Brothers Inc. (``Salomon'') requests an
order with respect to DECS Trusts and future trusts that are
substantially similar and for which Salomon will serve as a principal
underwriter (collectively, the ``Trusts'') that would (i) permit other
registered investment companies 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 Salomon at the time
of a Trust's initial issuance of securities.
FILING DATES: The application was filed on September 26, 1997. By
letter dated September 30, 1997, applicant's counsel stated that an
amendment, the substance of which is incorporated in this notice, will
be filed 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 to the SEC's Secretary and serving Salomon
with a copy of the request, personally or by mail. Hearing requests
should be received by the SEC by 5:30 p.m. on October 20, 1997, and
should be accompanied by proof of service on Salomon, 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. Salomon, Seven World Trade Center, New York, New York 10048.
FOR FURTHER INFORMATION CONTACT: Brian T. Hourihan, Senior Counsel, at
(202) 942-0526, 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 Representations
1. Each Trust will be a limited-life, grantor trust registered
under the Act as a non-diversified, closed-end management investment
company. Salomon 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,\1\ 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
[[Page 52167]]
Trust's termination. The Trusts will purchase the Contracts from
counterparties that are not affiliated with either the relevant Trust
or Salomon. 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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\1\ No Trust will hold Contracts relating to the Shares of more
than one issuer.
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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.\2\ 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.\3\
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\2\ 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.
\3\ 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 used by the Trusts will be listed on a national
securities exchange or traded on the National Association of Securities
Dealers Automated Quotation 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. Salomon 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 any separate investment adviser. The trustees will have no
power to vary the investments held by each Trust. A bank 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 paying agent,
registrar, and transfer agent with respect to the Securities of each
Trust. The bank will have no other affiliation with, and will not be
engaged in any other transaction with, and Trust. The day-to-day
administration of each Trust will be carried out by Salomon or the
bank.
6. The Trusts will be structured so that the trustees are not
authorized to sell the Contracts or Treasuries unless a default occurs
under a Contract and the Contract is accelerated. The Trusts will hold
the Contracts until maturity, 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 any other default provided for in the Contract, the
obligations of the counterparty under the Contract will be accelerated
and the available proceeds of the Contract will be distrubited to the
Security Holders.
7. The trustees of each Trust will be selected initially by
Salomon, 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 held 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'' \4\ or any greater number required by
the Trust'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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\4\ 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 of 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 will be structured so that its organizational and
ongoing expenses will not be borne by the Holders, but rather, directly
or indirectly, by Salomon, 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 Salomon).
Applicant's Legal Analysis
A. Section 12(d)(1)
1. Section 12(d)(1)(A)(i) of the Act prohibits any registered
investment company from owning more than 3% of the total outstanding
voting stock of any other investment company. 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. Salomon believes, in order for the Trusts to be marketed most
successfully, and to be traded at a price that most accurately reflects
their value, that it is necessary for the Securities of each Trust to
be offered to large investment companies and investment company
complexes. Salomon states that these investors seek to spread the fixed
costs of analyzing specific investment opportunities by making sizable
investments in those opportunities. Conversely, Salomon asserts that it
may not be economically rational for these investors, or their
advisers, to take the time to review an investment opportunity if the
amount that the investor would ultimately be permitted to purchase is
immaterial in light of the total assets of the investment company or
investment company complex. Therefore, Salomon argues that these
[[Page 52168]]
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).
Salomon requests that the SEC issue an order under section 12(d)(1)(J)
exempting the Trusts from these limitations.
4. Salomon 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. Salomon also states that
section 12(d)(1) was intended to address the layering of costs to
investors.
5. Salomon believes 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, Salomon argues that any concerns regarding undue influence will
be eliminated by a provision in the charter documents for the Trusts
that will required any investment companies owning voting stock of any
Trust in excess of the limits imposed by sections 12(d)(1)(A)(i) and
12(d)(1)(C) to vote their Securities in proportion to the votes of all
other Holders. Salomon also believes 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. Salomon believes 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 Salomon 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. Salomon 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 Salomon, the counterparties, or other
third parties. Thus, a Holder will not pay duplicative charges to
purchase Securities of any Trust. Finally, there will be no duplication
of advisory fees because the Trusts will be internally managed by their
trustees.
7. Salomon believes 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, Salomon asserts
that the Securities are intended to provide Holders with an investment
having unique payment and risk characteristics, including an
anticipated higher yield than the ordinary dividend yield on the Shares
at the time of the issuance of the Securities.
8. Salomon believes that the purposes and policies of section
12(d)(1) are not implicated by the Trusts and that the requested
exemption from section 12(d)(1) is consistent with the public interest
and the protection of investors.
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 that meet
certain conditions in recognition of the fact that, once the units are
sold, a unit investment trust requires much less commitment on the part
of the sponsor than does a management investment company. Rule 14a-3
provides that a unit investment trust 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. Salomon argues that, while the Trusts are classified as
management companies, they have the characteristics of unit investment
trusts. Investors in the Trusts, like investors in a unit investment
trust, will not be purchasing interests in a managed pool of
securities, but rather in a fixed and disclosed portfolio that is held
until maturity. Salomon believes that the make-up of each Trust's
assets, therefore, will be ``locked-in'' for the life of the portfolio,
and there is no need for an ongoing commitment on the part of the
underwriter.
3. Salomon 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, and 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, Salomon 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. Salomon also does not anticipate that the net worth
of the Trusts will fall below $100,000 before they are terminated.
4. 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. Salomon requests that the SEC issue an order
under section 6(c) exempting the Trusts from the requirements of
section 14(a). Salomon 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.
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 Salomon.
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. Salomon requests an exemption from sections 17(a)
(1) and (2) to permit the Trusts to purchase Treasuries from Salomon.
3. Salomon 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
[[Page 52169]]
overpay for securities. Salomon 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. Salomon 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. Salomon 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. Salomon 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. Salomon 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.
5. Salomon believes that the terms of the proposed transaction are
reasonable and fair and do not involve overreaching on the part of any
person, that the proposed transaction is consistent with the policy of
each of the Trusts, and that the requested exemption is appropriate in
the public interest and consistent with the protection of investors and
purposes fairly intended by the policies and provisions of the Act.
Applicant's Condition
Salomon 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 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 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 such 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 Salomon, 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 Trusts 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 Salomon
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 is 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 Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-26399 Filed 10-3-97; 8:45 am]
BILLING CODE 8010-01-M
