[Federal Register Volume 64, Number 194 (Thursday, October 7, 1999)]
[Notices]
[Pages 54698-54701]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26122]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 24065; 812-11242]
Merrill Lynch, Pierce, Fenner & Smith Incorporated; Notice of
Application
September 30, 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 (``Act'') for an exemption from
section 12(d)(1) of the Act and under section 6(c) of the Act for an
exemption from section 14(a) of the Act.
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SUMMARY OF APPLICATION: Merrill Lynch, Pierce, Fenner & Smith
Incorporated (``Merrill Lynch'') requests and order with respect to the
Exchangeable Preferred Trusts and future trusts that are substantially
similar and for which Merrill Lynch will serve as a principal
underwriter (``Trusts'') that would (i) permit other registered
investment companies, and companies excepted from the definition of
investment company under section 3(c)(1) or 3(c)(7) of the Act, to own
a greater percentage of the total outstanding voting stock
(``Securities'') of any Trust than that permitted by section 12(d)(1)
and (ii) exempt the Trusts from the initial net worth requirements of
section 14(a). Merrill Lynch also requests an order to amend a prior
order (``Prior Order'').\1\
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\1\ Merrill Lynch, Pierce Fenner & Smith Incorporated and
Merrill Lynch Government Securities, Inc., Investment Company Act
Release Nos. 22758 (July 22, 1997) (notice) and 22789 (Aug. 18,
1997) (order).
FILING DATES: The application was filed on August 3, 1998. Applicant
has agreed to file an amendment to the application, the substance of
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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 to the SEC's Secretary and serving
applicant 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 25,
1999, and should be accompanied by proof of service on applicant, in
the form of an affidavit, or, for lawyers, a certificate of service.
Hearing requests would 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, NW, Washington, DC 20549-
0609. Applicant, World Financial Center, North Tower, 250 Vesey Street,
New York, New York 10281-1318.
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 at the
SEC's Public Reference Branch, 450 Fifth Street, NW, Washington, DC
20549-0102 (tel. no. 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. Merrill Lynch or an entity controlling, controlled by, or
under common control with Merrill Lynch will serve as a principal
underwriter (as defined in section 2(a)(29) of the Act) or placement
agent of the Securities. Each Trust will issue Securities that are
exchangeable or redeemable for non-cumulative preferred shares
(``Shares'') of a non-United States issuer (the ``Share Issuer''). The
Securities may be issued through either a public or a private
offering.\2\
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\2\ Applicants also seek to amend the Prior Order to state that
Securities issued by Structured Yield Products Exchangeable for
Stock Trusts (``Structured Yield Trusts'') may be offered in private
placements as well as in public offerings.
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2. Each Trust will, at the time of the issuance of its Securities,
invest the proceeds in and hold debt securities (``Debt Securities'')
issued by a special purpose entity (``Debt Securities Issuer'').\3\
Each Trust's investment objective will be to distribute to the holders
of the Securities (`'Holders'') (i) pro rata the interest the Trust
receives on the Debt Securities from time to time and (ii) the ultimate
proceeds of the redemption of the Debt Securities upon the occurrence
of certain events (``Exchange Events'') which will be specified in the
agreement establishing the terms of each Trust and the Debt Securities
or the instrument or agreement, if any, pursuant to which the Debt
Securities are issued. Proceeds will consist of (i) Shares, (ii)
depositary shares (``Des'') representing Shares, (iii) cash from the
redemption or repurchase of Shares by the Share Issuer, or (iv) any
combination of the above (``Proceeds'').\4\ The Share Issuer will
determine the composition of the Proceeds following an Exchange Event.
No other party has discretion to vary the composition of the
Proceeds.\5\ A Trust will dissolve on or shortly after the occurrence
of an Exchange Event.
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\3\ All of the capital stock of the Debt Securities Issuer will
be owned by a charitable trust.
\4\ Pursuant to the terms of the Shares, the Share Issuer may be
entitled to redeem or repurchase the Shares for cash, subject to
regulatory consent or requirement, at its discretion after a
designated date or earlier upon certain tax, regulatory or other
specified events.
\5\ The Share Issuer may provide cash in lieu of fractional
shares or make other antidilution or similar arrangements.
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3. Applicant states that the Trusts' structure is designed to
enable the applicable Share Issuer to issue Shares on the date that the
Securities are issued. If the Share Issuer is a bank, this
[[Page 54699]]
structure allows the bank to raise regulatory capital. In addition, by
providing a method of making scheduled payments to Holders in lieu of
dividends on Shares, the structure enables such payments to be
deductible by the Share Issuer for tax purposes under the law of its
jurisdiction of organization and/or applicable tax treaty.
4. No Debt Securities will be issued to any other party. The Debt
Securities will be issued only in bearer form, will be denominated in
and pay interest at a designated annual rate in U.S. dollars and,
unless redeemed because of an Exchange Event, will be redeemed on their
designated maturity date.
5. The Debt Securities Issuer will use the proceeds from the sale
of the Debt Securities to purchase, at a price equal to their
liquidation preference, fully paid, non-dividend paying preference
shares (``Subsidiary Preference Shares'') issued by another special
purpose entity (the ``Subsidiary''). The Subsidiary will use the
proceeds from the sale of the Subsidiary Preference Shares to make a
payment to the Share Issuer in consideration for the issuance to the
Subsidiary of Shares or DSs representing fully paid Shares. The Share
Issuer will use the proceeds from the issue of the Shares to make a
capital contribution to a business trust established under the laws of
Delaware (the ``Distribution Trust''). The Distribution Trust will use
the Share Issuer's capital contribution to make one or more loans to
the Share Issuer and/or one or more of its wholly owned subsidiaries or
branches (each a ``Borrower''). Interest payments on the loans to the
Borrowers will be distributed by the Distribution Trust to the Debt
Securities Issuer, which will in turn use such payment to pay interest
on the Debt Securities and the operating expenses of the Trust, the
Debt Securities Issuer, and its affiliates.
6. If the Securities are publicly offered, they will be listed on a
national securities exchange or traded on the National Association of
Securities Dealers Automated Quotation System. Thus, such 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.
7. If the Securities are not publicly offered, pricing and trading
information will be that normally provided in the private markets. It
is expected that the best source of such information will be available
from the dealer or dealers making a market in the Securities. Whether
or not the Securities are publicly offered, Merrill Lynch currently
intends, but will not be obligated, to make a market in the Securities
of each Trust.
8. Each Trust will be internally managed by its trustees and will
not have any separate investment adviser. The trustees will have no
power to vary the investments held by each Trust. Each Trust will adopt
a fundamental policy that 100% of its portfolio will be invested in
Debt Securities and that the Debt Securities may not be disposed of
during the term of the Trust other than in connection with an Exchange
Event. The day-to-day administration of a Trust will be carried out by
a bank or trust company which also will act as custodian for the
Trust's assets and as paying agent and registrar with respect to the
Securities.
9. The trustees of each Trust will be selected initially by Merrill
Lynch, 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. The Holders
will be entitled to a vote for each Security held on all matters to be
voted on by the 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 or any greater number required by the
Trust's constituent documents. Unless the Holders so request, it is not
expected that the Trusts will hold any meeting of Holders, or that
Holders will ever vote. The Subsidiary, as holder of the Shares or DSs,
will or will cause the collateral agent to direct Shares to be voted as
directed by the Holders on matters in which the Shares have a right to
vote.
10. Each Trust's organizational costs will be paid directly or
indirectly by the Share Issuer or an affiliate. Each Trust will be
structured so that its ongoing expenses will not be borne by the
Holders, but rather, directly or indirectly, by the parties to the
transactions 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 the administrator, the custodian, and the
paying agent, and to each trustee, fees over the term of the Trust.
Such fees will be paid from the interest on the Debt Securities, which
will be establish at a rate designed to provide a spread for the
purpose of paying such expenses.
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. A company that is
excepted from the definition of investment company under section
3(c)(1) or 3(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 3(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, such exemption is consistent with the public
interest and protection of investors. Merrill Lynch requests an order
under section 12(d)(1)(J) to permit other registered investment
companies, and companies excepted from the definition of investment
company under section 3(c)(1) or 3(c)(7) of the Act, to own a great
percentage of the Securities of any Trust than that permitted by
section 12(d)(1).\6\
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\6\ The requested order also would amend the Prior Order to
permit companies excepted from the definition of investment company
by sections 3(c)(1) and 3(c)(7) of the Act to own a greater
percentage of the Securities of any Structured Yield Trust than that
permitted by section 12(d)(1) of the Act. In all other respects, the
terms and conditions of the Prior Order are unchanged.
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3. Merrill Lynch states that, in order for the Trusts to be
marketed most successfully, and to be traded 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. Merrill Lynch states that large investment companies
and investment company complexes seek to spread the fixed costs of
analyzing specific investment opportunities by making sizable
investments in those opportunities that prove attractive. Conversely,
it may not be economically rational for such investors, or their
advisers to take the time to review an investment opportunity if the
amount that they would ultimately be permitted
[[Page 54700]]
to purchase is immaterial in light of the total assets of the
investment company or investment company complex. Therefore, Merrill
Lynch argues that in order for the trusts to be economically attractive
to large investment companies and investment company complexes, such
investors must 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).
4. Merrill Lynch states that section 12(d)(1) was enacted in order
to prevent one investment company from buying control of other
investment companies and creating complicated pyramidal structures.
Merrill Lynch also states that section 12(d)(1) was intended to address
two principal abuses: the ``pyramiding'' of control by fund-holding
companies and the layering of costs to investors.
5. Merrill Lynch assets 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, Merrill Lynch 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)(A)(i) and 12(d)(1)(C) (including companies excepted
from the definition of investment companies by section 3(c)(1) and
3(c)(7) of the Act) to vote their Securities in proportion to the votes
of all other Holders. Merrill Lynch 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. Merrill Lynch 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 the Share Issuer or another
third party, not by the Holders. In addition, the Holders will not, as
a practical matter, because the organizational expenses (including
underwriting expenses) of the Trusts. Merrill Lynch asserts that the
organizational expenses will be borne by a Trust from the facility fee
it receives in connection with the investment in Debt Securities. 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 Trust will be internally managed by their trustees.
7. Merrill Lynch 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, Merrill Lynch
asserts that the Securities are intended to provide Holders with an
investment equivalent to an investment in Shares, while providing the
Shares Issuer with tax benefits normally associated with debt
instruments.
8. Merrill Lynch 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. Merrill Lynch 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 traditional 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. Merrill Lynch 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. Merrill Lynch 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, or in a transaction exempt from such
registration, 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 or placement agents will not be entitled to purchase less
than all of the Securities of each Trust. Accordingly, Merrill Lynch
states that 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. Merrill Lynch 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, such 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. Merrill Lynch requests that the SEC issue an
order under section 6(c) exempting the Trusts from any requirements of
section 14(a). Merrill Lynch 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.
Applicant's Condition
Merrill Lynch agrees that the order granting the requested relief
will be subject to the following condition:
1. Any investment company (including companies excepted from the
definition of investment companies by sections 3(c)(1) and 3(c)(7) of
the Act) 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.
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For the SEC, by the Division of Investment Management, pursuant
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-26122 Filed 10-6-99; 8:45 am]
BILLING CODE 8010-01-M
