[Federal Register Volume 60, Number 229 (Wednesday, November 29, 1995)]
[Proposed Rules]
[Pages 61454-61463]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29109]
[[Page 61453]]
_______________________________________________________________________
Part VIII
Securities and Exchange Commission
_______________________________________________________________________
17 CFR Parts 230, 239, and 270
Calculation of Yield by Certain Unit Investment Trusts; Proposed Rule
Federal Register / Vol. 60, No. 229 / Wednesday, November 29, 1995 /
Proposed Rules
[[Page 61454]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230, 239, and 270
[Release Nos. 33-7243; IC-21538; File No. S7-32-95]
RIN 3235-AG63
Calculation of Yield by Certain Unit Investment Trusts
AGENCY: Securities and Exchange Commission.
ACTION: Proposed amendments to rules and forms.
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SUMMARY: The Commission is proposing for public comment rule and form
amendments that would require certain unit investment trusts (``UITs''
or ``trusts'') to use a uniform formula to calculate yields quoted in
their prospectuses, advertisements, and sales literature. Use of the
uniform formula by UITs is designed to permit investors to assess more
accurately the anticipated yield from a UIT and to make comparisons of
yields among UITs.
DATES: Comments on the proposed amendments should be received on or
before January 29, 1996.
ADDRESSES: Three copies of all comments should be submitted to Jonathan
G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth
Street NW., Washington, D.C. 20549. All comment letters should refer to
File No. S7-32-95. All comments received will be available for public
inspection and copying in the Commission's Public Reference Room, 450
Fifth Street NW., Washington D.C. 20549.
FOR FURTHER INFORMATION CONTACT: Anthony R. Bosch, Senior Attorney, or
Joseph E. Price, Deputy Chief, (202) 942-0721, Office of Disclosure and
Investment Adviser Regulation, Division of Investment Management,
Securities and Exchange Commission, 450 Fifth Street NW., Washington,
D.C. 20549.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission
(``Commission'') today is proposing for comment:
(1) Amendments to Form S-6 [17 CFR 239.16] under the Securities Act
of 1933 [15 U.S.C. 77a et seq.] (the ``1933 Act''), the form used by
UITs to register securities under the 1933 Act, that would standardize
the computation of yield by certain UITs in their prospectuses;
(2) Amendments to rule 482 [17 CFR 230.482] under the 1933 Act,
together with the amendments to Form S-6, that would require certain
UITs including quotations of return in their advertisements also to
include a quotation of yield calculated in accordance with the formula
in Form S-6; and
(3) Amendments to rule 34b-1 [17 CFR 270.34b-1] under the
Investment Company Act of 1940 [15 U.S.C. 80a-1 et seq.] (``1940 Act'')
that would require certain UITs including quotations of return in their
sales literature also to include a quotation of yield calculated in
accordance with the formula in Form S-6.
Executive Summary
The Commission is proposing to adopt a uniform formula, called the
``Estimated Yield Formula,'' for the calculation of the anticipated
yield of UITs that invest substantially all of their assets in fixed
income securities (``Fixed Income UITs''). Under the proposed rule and
form amendments, a Fixed Income UIT would be required to include in its
prospectus a yield quotation calculated pursuant to the Estimated Yield
Formula (``Estimated Yield''). A Fixed Income UIT that includes a
quotation of yield, or other similar quotation purporting to
demonstrate the income to be earned or distributions to be made by the
UIT, in its advertisements and sales literature would be required to
include and give equal prominence to its Estimated Yield. The proposed
amendments are intended to establish a uniform standard for calculating
UIT yield to enhance the ability of prospective investors to make
informed investment decisions.
Table of Contents
I. Background
II. Discussion
A. Proposed Estimated Yield Formula
1. Sales Load
2. Compounding
3. Accrued Interest
4. Principal Account Cash Balances
5. Market Discount on Tax Exempt Securities
6. Preferred Stock, Asset-Backed Securities, and Adjustable-Rate
Securities
7. Units of Other Trusts
8. Tax Equivalent Yield
B. Scope of Application of the Proposed Estimated Yield Formula
1. Prospectuses
2. Advertisements and Sales Literature
3. Secondary Market Sales
C. Alternative Formula
III. General Request for Comments
IV. Cost/Benefit Analysis
V. Summary of Initial Regulatory Flexibility Act Analysis
VI. Paperwork Reduction Act
VII. Text of Proposed Rule and Form Amendments
I. Background
A UIT is a type of investment company that issues securities,
typically called ``units,'' representing undivided interests in a
relatively fixed portfolio of securities.1 UITs are typically
sponsored by broker-dealers, which assemble the UIT's portfolio
securities, deposit the securities in a trust, and sell units of the
UIT in a public offering. Unlike a mutual fund, a UIT does not have a
board of directors or an investment adviser and its portfolio is not
actively managed.
\1\Section 4(2) of the 1940 Act [15 U.S.C. 80a-4(2)] defines a
UIT as an investment company which (A) is organized under a trust
indenture, contract of custodianship or agency, or similar
instrument, (B) does not have a board of directors, and (C) issues
only redeemable securities, each of which represents an undivided
interest in a unit of specified securities. See generally Harman,
Emerging Alternatives to Mutual Funds: Unit Investment Trusts and
Other Fixed Portfolio Investment Vehicles, 1987 Duke L.J. 1045
(1987).
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UIT units are redeemable securities that entitle an investor to
receive his or her proportionate share of the UIT's net assets upon
redemption. Notwithstanding this characteristic of UIT units, most UIT
sponsors voluntarily maintain a secondary market for units of the UITs
they sponsor.2 This secondary market reduces the frequency with
which trusts are forced to liquidate as a result of unitholder
redemptions.
\2\Sponsors that maintain secondary markets in the shares of the
UITs they sponsor are considered issuers under section 2(4) of the
1933 Act [15 U.S.C. 77b(4)] and must comply with the registration
requirements of the 1933 Act for units they offer to the public. In
addition, under section 24(d) of the 1940 Act [15 U.S.C. 80a-24(d)],
a broker-dealer selling UIT shares in the secondary market must
comply with section 5(b) of the 1933 Act [15 U.S.C. 77e(b)] if the
sponsor is continuing to sell shares in the trust.
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UITs currently have approximately $74 billion in aggregate assets,
most of which (88 percent) are held by Fixed Income UITs.3 In
marketing Fixed Income UITs to investors, sponsors and broker-dealers
typically quote a rate of return that estimates the income that an
investor who holds a unit for the expected life of the UIT can
anticipate receiving. This method of marketing Fixed Income UITs is
similar to the manner in which individual bonds are marketed to
investors based on a bond's ``yield to maturity,''4 and may be
contrasted to mutual fund performance marketing, which is based
exclusively on the past performance of the mutual fund.5 The
prominence of the
[[Page 61455]]
anticipated income rate to the investment decisions of UIT investors
makes it particularly important that the rate is uniformly and
accurately calculated.
\3\Source: Investment Company Institute. Tax-free debt
securities represent approximately $57 billion (89 percent) of the
securities held by Fixed Income UITs. Id.
\4\Yield to maturity is the discount rate that equates the
present value of future promised cash flows from the security to the
current market price of the security. See W. Sharpe, Investments,
1028 (5th ed. 1995).
\5\See Item 22(b) of Form N-1A under the 1940 Act [17 CFR
274.11A], which specifies the manner in which mutual funds calculate
yield and total return. Investment Company Act Rel. No. 16245 (Feb.
2, 1988) [53 FR 3868 (Feb. 10, 1988)] (adopting amendments to rule
482 and other rules to standardize the calculation of mutual fund
performance).
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Before 1989, estimated current return (``ECR'') was the performance
measurement used by Fixed Income UITs. The ECR of a trust is calculated
by dividing the trust's annual interest income per unit (net of
expenses) by the offering price per unit.6 While a trust's ECR is
a reasonably accurate measure of anticipated cash flows from a unit, it
does not take into account the full effect of bonds in a trust's
portfolio that are trading at a market discount or premium in the same
manner as the yield to maturity of a bond. As a result, the ECR of a
Fixed Income UIT comprised of premium bonds may overstate the return
that may be reasonably anticipated over the life of the trust.7
\6\ECR is analogous to ``current yield,'' a method of quoting
yield on an individual bond based on the amount of annual income an
investor will earn if the bond is purchased today, as a percentage
of today's price. See W. Sharpe supra note 4 at 1006.
\7\For example, a Fixed Income UIT consisting of bonds that, at
the time of deposit, were trading at 10% premium to their par value,
paying a 5% interest coupon every six months, and maturing in ten
years, would have an ECR of 9.09% (assuming no sales load or
expenses). If, however, a unitholder holds the units until maturity,
the unitholder's return would be 8.5%. The lower rate reflects that
the 10% premium would not be recovered by the unitholder when the
UIT matures.
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ECR was developed at a time when interest rates were fairly stable
and UIT sponsors bought and deposited bonds at par. In the 1970s,
interest rates became more volatile,8 and in the 1980s the
practices of some UIT sponsors began to change. In 1989, the
Commission's staff became aware that some UITs proposed to invest a
significant portion of their assets in premium bonds.9 In response
to concerns expressed by the staff that the quotation of ECR by such
trusts could mislead prospective investors, the UIT industry developed
a formula, the estimated long-term return (``ELTR'') formula,10 as
a solution to ECR's limitations.11 ELTR is calculated by averaging
the yields to maturity of the bonds held by a UIT, giving weight to the
period remaining to maturity of each bond and the percentage of the
UIT's portfolio that consists of each bond. Because yield to maturity
reflects any premium or discount at which a bond may be trading, ELTR
addressed the primary limitation of the ECR formula and the concerns of
the staff.
\8\From 1970 to 1980 interest rates on six-month treasury
securities ranged from 5.25% in 1976 to 11.43% in 1980. See
Statistical Abstracts of the United States, U.S. Department of
Commerce, 522-23 (1981) (based on annual averages of monthly data
for interest rates between 1970 and 1980). In the 1980s, interest
rates on six-month treasury securities ranged from 13.81% in 1981 to
6.02% in 1986. See Statistical Abstracts of the United States, U.S.
Department of Commerce, 525 (1994) (based on annual averages of
monthly data for interest rates between 1980 and 1990).
\9\The staff became aware of these UITs during its routine
review of pre-effective offerings. Several articles in the financial
press also raised questions whether ECR was an appropriate measure
of yield for a UIT that held significant investments in premium
bonds. See e.g., Weberman, Doesn't Honesty Sell? Forbes, Oct. 16,
1989, at 297.
\10\In 1989, an ad hoc committee of UIT sponsors, formed to
study the calculation of UIT yield, submitted to the Commission a
proposed uniform UIT yield formula. Letter from James J. Wesolowski,
Vice President and General Counsel, John Nuveen & Co. Inc., to
Robert E. Plaze, Special Counsel, Division of Investment Management
(Apr. 11, 1989). Subsequently, the Investment Company Institute
submitted a revised UIT yield formula. Letter from David Silver,
President, Investment Company Institute, to Kathryn B. McGrath,
Director, Division of Investment Management (Dec. 7, 1989). A copy
of each letter is contained in File No. S7-32-95.
\11\At the time, the Commission's Division of Investment
Management adopted a policy of not exercising its delegated
authority to accelerate the effectiveness of any UIT registration
statement the prospectus of which disclosed the UIT's ECR unless the
prospectus also contained the UIT's ELTR. See letter to Registrants
from Carolyn B. Lewis, Assistant Director, Division of Investment
Management (Jan. 11, 1990). Subsequent to the Division's 1990
letter, the Directors of the Divisions of Market Regulation and
Investment Management sent a letter to UIT sponsors and broker-
dealers that are active in the UIT secondary market stating that
quotations of a UIT's ECR should be accompanied by a quotation of
the UIT's ELTR, if the ECR varies materially from the estimated
long-term return of the trust. Letter from Marianne K. Smythe,
Director, Division of Investment Management, and William H. Heyman,
Director, Division of Market Regulation (Apr. 8, 1992). A copy of
each letter is contained in File No. S7-32-95.
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Since 1989, the UIT industry and the Commission's staff have held
discussions to develop a permanent UIT yield formula. In March of this
year, the Investment Company Institute (``ICI'') submitted to the
Commission a rulemaking proposal to standardize the calculation of UIT
yield based on a revised ELTR formula.12 The revisions primarily
were intended to address deficiencies in the application of the ELTR
formula to trusts with short-term termination dates (or trusts that are
likely to terminate in the near future due to bonds in the trust's
portfolio being called). The Division of Investment Management, in a
letter to the ICI, stated that it would not object to the use of the
ELTR formula, revised in accordance with the ICI's proposal, until the
Commission adopts rule and form amendments concerning a uniform yield
formula for UITs.13
\12\See letter from Craig S. Tyle, Vice President and Senior
Counsel, Investment Company Institute, to Robert E. Plaze, Assistant
Director, Division of Investment Management (Mar. 24, 1995). A copy
of this letter is contained in File No. S7-32-95.
\13\Investment Company Institute, (pub. avail. Aug. 2, 1995).
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II. Discussion
The Commission is now proposing to adopt rule and form amendments
to codify a uniform method for the calculation of yield by UITs. The
proposed Estimated Yield Formula is based largely on the ELTR formula
but, as suggested by the ICI's most recent submission and described in
more detail below, would include an adjustment that would require a
trust that charges a sales load to reflect the amortization of the load
based on the weighted-average expected life of the trust's portfolio
securities. The proposed Estimated Yield Formula would be used to
determine the yield of newly offered trusts, as well as for trusts the
units of which trade in a secondary market.
A. Proposed Estimated Yield Formula
Under the proposed Estimated Yield Formula, a Fixed Income UIT
would calculate its Estimated Yield by first calculating the average
yield to maturity, weighted by market value and time to maturity, of
its portfolio securities, reducing this yield by trust expenses
(expressed as a percentage), and multiplying the remainder by a
percentage representing the net amount of the trust's offering price
that is invested.14 The proposed Estimated Yield Formula would
then require a Fixed Income UIT to reduce the resulting ratio by a
``sales charge factor'' to reflect the ``cost'' to a UIT investor of
not receiving upon termination of the trust (or upon sale or redemption
of the units or partial liquidation of the trust) the portion of the
amount initially invested that represents sales load. Thus, the
proposed Estimated Yield Formula would not only reflect premiums or
discounts on portfolio securities, but also the ``premium'' an investor
who is charged a sales load pays for the units.
\14\This last step reflects that a portion of the offering price
will be deducted in the form of a sales load and thus, will not be
invested and earn income for the unitholder. As discussed infra
section II.A.1. of this Release, this step does not, however,
reflect the effect on investor return that the amount of the sales
load will not be returned to the investor at the termination or
redemption of the trust.
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1. Sales Load
a. Front-End Sales Loads. Most investors in an initial offering of
a UIT pay at the time of purchase a sales load (``front-end'' sales
load) calculated as a
[[Page 61456]]
percentage of the public offering price.15 Although the ELTR
formula currently being used reflects that a portion of the offering
price representing sales load will not be invested (and thus will not
earn interest for the unitholder), it does not amortize sales load to
reflect the effect on investor return of not receiving the sales load
at the termination of the trust or redemption of the units. This
limitation has the greatest effect for yield calculations involving
short-term trusts and trusts that are likely to terminate in the near
term due to bonds in the portfolio being called.16 In attempting
to deal with this limitation, the proposed Estimated Yield Formula
would require Fixed Income UITs to amortize sales load to reflect more
accurately the effect of sales load on investor return.
\15\Some UITs, pursuant to a Commission exemptive order, have
implemented deferred or installment loads. See discussion infra
section II.A.1.b.
\16\For example, assuming the trust in supra note 7 charged a
4.8% sales load and matured in five years, the ELTR of the trust
would be 8.09%, although the investor's actual return would be
6.34%.
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Under the proposed formula, a Fixed Income UIT would amortize sales
load over a time period (``amortization period'') determined by
averaging the ``expected lives'' of the bonds in the trust weighted by
market value.17 The expected life of most bonds in the portfolio
would be determined by each bond's maturity date.18 To account for
the possibility of an early redemption of the bonds, however, the
proposed Estimated Yield Formula would require trusts to calculate the
expected life of a bond with call features by comparing the bond's
yield to maturity to the bond's yield to ``worst'' call (the call
feature to which the bond is priced that would result in the bond's
lowest yield).19 A bond's worst call date would be used if the
bond's yield to maturity exceeds its yield to worst call by more than
40 basis points.20
\17\Instruction 8 to the proposed Estimated Yield Formula. For
purposes of simplification, proposed amendments to rule 482,
(requiring disclosure in trust advertisements and sales literature),
would refer to the expected life of each bond in the trust as the
``expected life of the trust.'' Proposed rule 482(f) under the 1933
Act [17 CFR 230.482(f)].
\18\The maturity date is the date upon which the principal of a
debt security becomes due and payable to the securityholder. See
Glossary of Municipal Securities Terms, Municipal Securities
Rulemaking Board, (Adapted from the State of Florida's Glossary of
Municipal Bond Terms) (1985).
\19\Rules adopted by the Municipal Securities Rulemaking Board
(``MSRB'') require that, when confirming customer orders, yield be
calculated to the lowest yield to call, yield to par option, or
yield to maturity (``yield to worst''). This assures that an
investor will realize, at a minimum, the stated yield, even in the
event that a call provision is exercised. MSRB Rule G-15(a)(i)(I),
MSRB Manual (CCH) para.3571.
\20\Maturity date would be used to determine the expected life
of any bond priced at par or at a discount and for any bond priced
at a premium if the bond's yield to maturity does not exceed the
bond's yield to worst call by more than 40 basis points (.4%).
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The Commission considered requiring, as an alternative method of
determining the amortization period, the use of the weighted average of
each bond's worst call date as the expected life of the trust. In its
submission, the ICI explained that this alternative may underestimate
the life of a bond (and thus, the expected life of the trust),
particularly when transaction costs would make many refundings
economically infeasible.21 Because the likelihood of a bond being
called depends in large part on whether the refunding will provide
sufficient savings to the issuer, the ICI stated that the ``spread''
between a bond's yield to maturity and its yield to call would provide
an appropriate measure for determining a bond's expected life--the
greater the savings for the issuer, the more likely the bond will be
called.
\21\See letter from Craig S. Tyle, Vice President and Senior
Counsel, Investment Company Institute, supra note 12.
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The Commission also considered an alternative that would require
the amortization period to be determined by the expected life of the
trust. The Commission is not proposing this method because such a
method would permit a trust sponsor to lengthen the amortization period
by including one long-term bond in a trust consisting of bonds that
have much shorter maturities.22 Moreover, such a method would
appear not to reflect accurately the effect on investor return of an
early partial or complete liquidation of the trust and, thus, would
result in an amortization period that is too long. In the same way
sales load affects yield on an investment in a short-term trust more
than an investment in a long-term trust, a unitholder's yield from an
investment in a long-term trust will be affected if a portion of the
investment is returned before maturity. To account for these effects,
under the proposed formula, sales load would be amortized over the time
each dollar of a unitholder's investment can be expected to remain
invested, assuming the unitholder does not sell or redeem trust units
before termination of the trust.
\22\Id.
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The proposed Estimated Yield Formula would amortize the sales load
over the amortization period using a method designed to reduce annual
yield by an amount equal to a stream of future annual payments that
equate to the amount of the front-end sales load. Comment is requested
on the proposed Estimated Yield Formula's method of amortization of
sale load and, specifically, on alternative methods that might reflect
more accurately the effect of sales load on investor return. Comment is
requested on an alternative method that would require sales load to be
amortized by treating the load as an additional premium in a bond's
yield to maturity calculation. This alternative would require a trust
to calculate each bond's yield to maturity by adding to the price of
the security an amount equal to the security's pro rata portion of the
sales load weighted by the security's market value.23 In addition,
comment is requested on a straight-line amortization method (i.e.,
dividing the sales load by the amortization period) and whether this
alternative would provide a simpler method for amortizing sales load.
\23\Under this alternative, the portfolio's weighted average
yield to maturity would not be reduced by multiplying the yield by a
percentage representing the net amount of the trust's offering price
that is invested.
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b. Deferred Sales Loads. The Commission has issued several
exemptive orders permitting UITs to impose sales charges on units on a
deferred basis.24 Under the terms of the exemptions, a UIT sponsor
determines the maximum sales charge per unit at the time portfolio
securities are deposited in a trust, and the sales charge is paid by
the unitholder in installments over a period following the purchase of
the units.25 The proposed Estimated Yield Formula would require
Fixed Income UITs to use the maximum sales load, determined by the
sponsor at the time of deposit, for calculating Estimated Yield of
trusts whose unitholders pay a deferred or installment load.26
\24\See Merrill Lynch, Pierce, Fenner & Smith, Inc., Investment
Company Act Rel. Nos. 13801 (Feb. 29, 1984) [49 FR 8512 (Mar. 7,
1984)]; 13848 (Mar. 27, 1984) [30 SEC Docket 192]; 15120 (May 29,
1986) [51 FR 20389 (June 4, 1986)]; and 15167 (June 24, 1986) [35
SEC Docket 1735]. PaineWebber, Inc., Investment Company Act Rel.
Nos. 20755 (Dec. 6, 1994) [59 FR 64003 (Dec. 12, 1994)]; and 20819
(Jan. 4, 1995) [58 SEC Docket 1586].
\25\Id. The installments are paid from the distributions of the
trust until the maximum sales charge is collected. If distribution
income is insufficient to pay a deferred sales charge installment,
the trustee, under the terms of the trust indenture, will sell
portfolio securities in an amount necessary to provide the requisite
payments. If a unitholder redeems or sells to the sponsor his or her
units before the total sales charge has been collected from
installment payments, the balance of the sales charge may be
collected at the time of the redemption or sale.
\26\Instruction 7 to the proposed Estimated Yield Formula.
[[Page 61457]]
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2. Compounding
The proposed Estimated Yield Formula would omit a step proposed by
the ICI in which a trust's average yield to maturity is divided by
twelve and re-annualized using a method that, in effect, would compound
a monthly yield. The Commission is concerned that such a calculation
could materially overstate the anticipated yield of a trust and is not
proposing to provide for compounding of a trust's average yield to
maturity.
In its request for rulemaking and in other correspondence with the
staff, the ICI has argued that Fixed Income UITs primarily compete with
mutual funds.27 Mutual funds calculate yield according to a
Commission formula that effectively compounds earnings.28 The ICI
believes that Fixed Income UITs also should be permitted to compound
earnings or they would be placed at a competitive disadvantage to
mutual funds.29
\27\See letter from Craig S. Tyle, Vice President and Senior
Counsel, Investment Company Institute, supra note 12; letter from
David Silver, President, Investment Company Institute, supra note
10; letter from Craig S. Tyle, Associate General Counsel, Investment
Company Institute, to Gene Gohlke, Acting Director, Division of
Investment Management (June 29, 1990). A copy of each letter is
contained in File No. S7-32-95.
\28\Item 22(b) of Form N-1A under the 1940 Act [17 CFR 274.11A].
\29\In an earlier submission, however, the UIT industry asserted
that the formula should replicate the yield of a bond. See letter
from James J. Wesolowski, Vice President and General Counsel, John
Nuveen & Co. Inc., supra note 10. This submission included a
proposed formula, the ELTR formula UITs currently use to calculate
yield, that does not compound yield to maturity.
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The compounding element of the mutual fund yield formula reflects
the internal compounding of dividends within mutual funds as a result
of their reinvestment of interest from bonds (and other securities)
upon receipt. Because of the fixed nature of UITs, interest payments
received are not reinvested, but are held by the trust's custodian
until they are distributed to unitholders, and thus no compounding
occurs within the UIT.30 The ICI has suggested, however, that
because dividends distributed to unitholders may be reinvested in a
mutual fund made available by a UIT sponsor, unitholders may obtain the
benefits of compounding. A similar argument may be made for compounding
the calculation of yield to maturity of a bond. In both the cases,
however, such a yield would not constitute a yield from an investment,
but from an investment plan. Moreover, the ICI's proposed formula would
assume reinvestment of interest payments immediately upon receipt by
the trust and would not reflect the delay from the time a trust
receives the coupon payments until it distributes those payments to
unitholders, when only then could they reinvest the
distributions.31
\30\To the extent that the use of the dividends and other income
by the trust custodian before their distribution reduces the
custodian's fees and thus UIT expenses, their use already would be
reflected in the proposed Estimated Yield Formula as a higher
resulting Estimated Yield.
\31\See letters from the Investment Company Institute cited in
supra note 27.
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In developing this proposal and reviewing the ICI proposal, the
Commission has been primarily concerned with the accuracy of the
formula. Compounding yield to maturity of a trust's portfolio
securities would result in a trust advertising an Estimated Yield of
the UIT that is higher than the yield an investor would have obtained
if the investor purchased each security outside of the UIT. For
example, if a bond trading at par with a yield to maturity of 8 percent
is deposited into a UIT (assuming no trust expenses or sales load), the
ICI-proposed formula would produce a yield of 8.13 percent.32 To
avoid such a result, the Commission is not proposing that the Estimated
Yield Formula provide for compounding.
\32\Higher yields would produce greater differences between the
yields.
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Comment is requested whether the Estimated Yield Formula should
contain an element of compounding. Commenters supporting compounding
should address the variance that would be created between the yields to
maturity of the bonds in which UITs invest and Estimated Yield that
would be calculated under such a formula.
3. Accrued Interest
The public offering price of units of a Fixed Income UIT includes
not only the price of the securities in a portfolio plus a sales
charge, but also a proportionate share of accrued interest of each
security in the trust.33 The amount an investor pays for the
purchase of a bond, also includes accrued interest. The calculation of
a bond's yield to maturity excludes consideration of the accrued
interest because it will be returned to bondholders upon receipt of the
next interest payment. Thus, the amount of accrued interest paid by a
purchaser of a bond does not represent part of the bondholder's
investment. In contrast, all of the accrued interest paid by a
unitholder of a UIT will not be returned in the trust's first
distribution; some or all will remain part of the net asset value of
the trust and will be used to eliminate fluctuations in periodic
distributions and to compensate the trustee who has use of the cash.
\33\Accrued interest on the purchase of a bond is the dollar
amount of interest, based on the coupon rate of interest, which has
accumulated on a security from the most recent interest payment date
up to but not including the date of settlement of the purchase.
Accrued interest is paid to the seller by the purchaser of a bond.
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Unitholders generally receive equal distributions, on a monthly,
quarterly, semi-annual, or annual basis, based on the interest income
of the bonds in the portfolio less expenses. Because interest on the
bonds is not received at a constant rate throughout the year, a trust
may not have cash from interest payments available to meet
distributions to unitholders at the end of a period. In such a case,
the trustee will draw on the accrued interest account, which will be
replenished during a period in which interest is received in excess of
what is needed to make distributions to unitholders. A trust's retained
accrued interest balance generally remains positive after the trust's
first distribution.34 Each unit's proportionate share of retained
accrued interest, if any, is part of the trust's net asset value. As
such, it is returned to unitholders upon redemption, sale of a unit, or
liquidation of the trust.35
\34\See letter from David Silver, President, Investment Company
Institute, supra note 10.
\35\In addition, as securities in the portfolio mature, or are
called or sold, the accrued interest applicable to such bonds is
distributed to unitholders.
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The proposed Estimated Yield Formula would reflect the delay in
repayment of accrued interest by treating accrued interest as of the
date of deposit as a trust asset.36 The formula would achieve this
result by requiring Fixed Income UITs, in calculating the yield to
maturity of each bond in the trust's portfolio, to subtract from the
amount of the bond's first coupon payment and to add to the amount of
the bond's last coupon payment the amount of the bond's accrued
interest as of the date of deposit of the bond in the trust.37 The
Commission requests comment on the proposed treatment of accrued
interest under the Estimated Yield Formula.
\36\In its 1989 submission, the ICI proposed to treat accrued
interest as a non-earning asset, although the method used would have
been different from that of the proposed Estimated Yield Formula,
reflecting differences in the two formulas. See letter from David
Silver, President, Investment Company Institute, supra note 10. The
ICI's 1995 submission, upon which the Estimated Yield Formula is
based, does not appear to provide for similar treatment.
\37\Instruction 2 to the proposed Estimated Yield Formula. This
Instruction would not apply to trusts in which all accrued interest
at the date of deposit is paid by the sponsor or a person other than
a unitholder.
[[Page 61458]]
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4. Principal Cash Balances
Units purchased in the secondary market often have, as a component
of their net asset value, cash balances that represent proceeds from
bonds that have matured, or have been redeemed, called, or sold. This
cash is held by the trust in the form of principal account cash
balances to be distributed to unitholders as part of the next
distribution. These amounts are returned to unitholders shortly after
their receipt by the trust and do not represent part of the
unitholders' investment. Thus, the proposed Estimated Yield Formula
would exclude these amounts from the calculation of the trust's net
asset value.38
\38\In its 1989 submission, the ICI suggested a similar
treatment of principal account cash balances. See letter from David
Silver, President, Investment Company Institute, supra note 10.
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5. Market Discount on Tax Exempt Securities
The proposed Estimated Yield Formula would require Fixed Income
UITs, in determining the yield to maturity of tax exempt securities
held by the trust, to exclude any market discount that would be treated
as capital gain under federal income tax.39 In its 1989
submission, the ICI proposed an alternative that would permit Fixed
Income UITs to quote an Estimated Yield that reflects the accretion of
market discount and to disclose the portion of that yield that could be
subject to federal income tax.40 The Commission is not proposing
to include the ICI's proposed alternative in the determination of
Estimated Yield out of concern that the ICI's approach would lead to a
confusing multiplicity of Estimated Yield quotations, particularly for
prospective investors in trusts quoting more than one yield because of
different distribution options.41 The Commission requests comment
on the Estimated Yield Formula's proposed treatment of market discount
on tax exempt securities.
\39\Instruction 5 to the proposed Estimated Yield Formula. This
approach is similar to the treatment of market discount on tax
exempt securities by the mutual fund yield formula. See Instruction
1(e) to Item 22(v)(ii) to Form N-1A under the 1940 Act [17 CFR
274.11A].
\40\See letter from David Silver, President, Investment Company
Institute, supra note 10.
\41\See discussion supra section II.A.3.
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6. Preferred Stock, Asset-Backed Securities, and Adjustable-Rate
Securities
As discussed above, the proposed Estimated Yield Formula is
designed to measure the anticipated yield from a portfolio of fixed
income securities that yield income at a predictable rate. Most UITs
that invest their assets in corporate, municipal, or U.S. government
bonds invest almost exclusively in these securities. These securities
are issued with stated maturities and fixed interest rates, and thus,
the yield of trusts that invest in these securities can be estimated
with reasonable certainty. A Fixed Income UIT, however, may have some
of its assets invested in preferred stock, asset-backed
securities,42 or adjustable-rate securities,43 the issuers of
which have no legal obligation to pay a fixed amount of interest or
dividends. Because the income from these securities is not as
predictable as the income from traditional bonds, the Commission is
proposing to require trusts holding these instruments to disclose in
their prospectuses, advertisements, and sales literature that some of
their assets are invested in these types of securities and that, as a
result, their yields likely will fluctuate.44
\42\The cash flows of asset-backed securities, including
mortgaged-backed securities, are based on an underlying pool of
mortgages or other income-producing assets. See F. Fabozzi, The
Handbook of Fixed Income Securities, 16-19 (4th ed. 1995).
\43\Adjustable-rate securities, including floating-rate and
variable-rate securities, have interest rates that adjust
periodically over their stated life. Id. at 7.
\44\Instruction 15 to the proposed Estimated Yield Formula. The
proposed Estimated Yield Formula also would provide specific
instructions for calculating yield to maturity for these securities
and for determining their expected life for purposes of amortizing
sales load. Instructions 12-14 to the proposed Estimated Yield
Formula.
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Approximately three percent of the assets of UITs are invested in
trusts substantially all the assets of which consist of preferred
stock, asset-backed securities, or adjustable-rate securities.45
The Commission is proposing that these UITs use the proposed formula to
calculate yield, but would require them to characterize the yield as
``Current Yield'' to emphasize that it does not represent a rate an
investor can expect to receive in the future. In addition, these trusts
would be required to provide a statement that, because the continued
payment of interest (and return of principal for asset-backed
securities) for these types of securities cannot be predicted, the
trust's yield will vary and, as a result, actual investor experience
will be different from the quoted yield.46
\45\Source: Investment Company Institute.
\46\Instruction 16 to the proposed Estimated Yield Formula.
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The Commission requests comment on the proposed treatment of
preferred stock, asset-backed securities, and adjustable-rate
securities. Specifically, the Commission requests comment whether the
proposed disclosure adequately would inform investors of the
uncertainty of yield estimates for trusts that invest in these types of
securities. The Commission also requests comment whether the proposed
formula should define those trusts that invest ``substantially'' all
their assets in preferred stock, asset-backed securities, and
adjustable-rate securities and, if so, what that definition should be.
7. Units of Other Trusts
Fixed Income UITs sometimes hold units of other trusts in their
portfolios. Although the Estimated Yield of these trusts could be used
as their yield to maturity in the Estimated Yield Formula, in its 1989
submission the ICI urged that the Commission not adopt such a
requirement because it would be complicated and burdensome. According
to the ICI, in many cases these trusts are no longer offered in the
secondary market and thus the trust sponsor no longer calculates their
yield.47 Instead, the ICI suggested that the Commission permit
UITs to calculate the yield to maturity of these units based on the
average dollar price, average coupon rate, and average yield to
maturity of the securities held by the trust.48 The Commission is
proposing the approach recommended by the ICI, but only for units of
trusts that are not currently calculating Estimated Yield.49
\47\See letter from David Silver, President, Investment Company
Institute, supra note 10.
\48\Id.
\49\Instruction 6 to the proposed Estimated Yield Formula.
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8. Tax Equivalent Yield
The proposed Estimated Yield Formula would provide Fixed Income
UITs a method of calculating a tax equivalent yield.50 A tax
equivalent yield would demonstrate the taxable yield necessary to
produce an after-tax yield equivalent to that of a trust which invests
in tax exempt securities. Under the proposal, tax equivalent yield
would be calculated by dividing that portion of the yield of the trust
that is tax exempt by one minus a stated income tax rate and adding to
the product that portion, if any, of the yield of the trust that is not
tax exempt.51 This would provide a
[[Page 61459]]
uniform method for calculating tax equivalent yield.52 The
Commission requests comment on the proposed method of calculating tax
equivalent yield for Fixed Income UITs. In addition, the Commission
requests comment whether bonds that distribute interest income that may
be subject to the alternative minimum tax under Federal tax law should
be considered taxable bonds for purposes of the proposed Estimated
Yield Formula. The Commission requests comment whether, if these bonds
are not considered taxable bonds, additional disclosure should be
required by trusts holding themselves out as distributing tax exempt
income but which invest in bonds that distribute interest income that,
when distributed to unitholders, may be subject to the alternative
minimum tax.
\50\UITs would not be required to quote a tax equivalent yield.
\51\Instruction 10 to the proposed Estimated Yield Formula. The
proposed method of calculating tax equivalent yield is similar to
the mutual fund yield formula's method of calculating tax equivalent
yield. See Item 22(b) of Form N-1A under the 1940 Act [17 CFR
274.11A].
\52\A UIT that includes a quotation of tax equivalent yield in
its prospectuses, advertisements and sales literature would be
required to provide a quotation of its Estimated Yield at least as
prominently as its tax equivalent yield.
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B. Scope of Application of the Proposed Estimated Yield Formula
1. Prospectuses
The Commission is proposing to amend Form S-6 to require Fixed
Income UITs to include in the summary financial data, typically
provided in the front part of each UIT prospectus, a quotation of its
Estimated Yield. The proposed Estimated Yield Formula would define
``Fixed Income UITs'' as trusts investing substantially all their
assets in bonds and other debt instruments, preferred stock, or a
combination of these types of securities. Comment is requested on the
proposed definition of Fixed Income UITs. Comment is specifically
requested whether the Estimated Yield Formula should define the term
``substantially,'' and, if so, what that definition should be.
The amendments would not preclude a trust from including a
quotation of the UIT's ECR provided that, under the circumstances, the
ECR is not misleading and that the differences between ECR and
Estimated Yield are clearly described in the prospectus. As proposed,
the amendments would require a trust using ECR or some other method of
estimating return (e.g., ELTR) to include a brief description of the
differences between Estimated Yield and the other method and a
statement that the trust's Estimated Yield is calculated following a
Commission-prescribed formula designed to estimate the yield an
investor holding a unit for the expected life of the trust may
receive.53
\53\Paragraph (f)(3) of the proposed Estimated Yield Formula.
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2. Advertisements and Sales Literature
The Commission is proposing to amend rule 482 under the 1933 Act
and rule 34b-1 under the 1940 Act to require Fixed Income UITs to
include a quotation of Estimated Yield, as prescribed by Form S-6, in
their advertisements and sales literature that contain a quotation of
yield, or other similar quotation purporting to demonstrate the income
earned or distributions made or to be made by a Fixed Income
UIT.54 Advertisements and sales literature of Fixed Income UITs
that contain a quotation of yield also would be required to contain a
legend disclosing that the Estimated Yield quoted is an estimate of the
rate of return an investor holding a unit for the expected life of the
trust may receive, actual return to the investor may vary from the
estimate, and that an investor's units, when redeemed, may be worth
more or less than their original cost.55 As discussed above, Fixed
Income UITs that invest substantially all or a portion of their assets
in preferred stock, asset-backed securities, or in adjustable-rate
securities would be required to provide additional disclosure in their
advertisements and sales literature.56
\54\Proposed rule 482(f) under the 1933 Act [17 CFR 230.482(f)];
proposed rule 34b-1(c)(2) under the 1940 Act [17 CFR 270.34b-
1(c)(2)].
\55\Proposed rule 482(a)(8) under the 1933 Act [17 CFR
230.482(a)(8)]; proposed rule 34b-1(c)(1) under the 1940 Act [17 CFR
270.34b-1(c)(1)].
\56\Instructions 15-16 to the proposed Estimated Yield Formula.
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Under the proposed amendments, UITs may continue to advertise
performance information other than Estimated Yield or Current Yield,
including ECR, if a quotation of Estimated Yield is included at least
as prominently as the other performance information. The Commission
requests comment whether the performance information permitted in all
Fixed Income UIT advertisements should be limited to the yields
calculated pursuant to the proposed Estimated Yield Formula.
3. Secondary Market Sales
As discussed above, sponsors generally maintain a secondary market
in units of the UITs they sponsored. Sponsors typically repurchase
units at the redemption price or net asset value of the trust based on
the bid side evaluation of the bonds and resell the units to new
investors based on the offer side evaluation of the bonds. The proposed
Estimated Yield Formula would require that UITs calculate Estimated
Yield based on the maximum offering price per unit, which, in the case
of a trust the units of which are trading in a secondary market, would
be the price at which the sponsor is willing to resell the
units.57
\57\Instruction 11 to the proposed Estimated Yield Formula.
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In some cases, an investor who purchases a UIT in the secondary
market will be charged a sales load. The proposed Estimated Yield
Formula would require UITs to include in the public offering price of
the units the maximum sales load that may be charged to an investor in
the secondary market.58
\58\Id.
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C. Alternative Formula
The Commission requests comment whether, in lieu of the Estimated
Yield Formula, the Commission should require a trust to calculate and
disclose a yield measured by the trust's internal rate of return
(``IRR''). IRR is the discount rate that would make the amount paid by
the investor for the investment (including sales load) equivalent in
value to the payments expected from the trust.59 Unlike the
Estimated Yield Formula, IRR would take into consideration different
cash flows unitholders selecting different distribution options will
receive. The Commission's staff has discussed with the ICI the
desirability and feasibility of a UIT yield formula based on a trust's
IRR.60 In correspondence with the staff in 1990, the ICI asserted
that the amount of computer time required to generate IRR for each
distribution option for each trust would be so great as to
significantly disrupt UIT sponsors' computer operations and increase
UIT expenses.61 In light of the significant advancements in
computer technology over the past several years, the Commission
requests comment whether calculation of IRR would be feasible, and, if
so, whether IRR could provide an accurate but simpler method for
calculating UIT yield than the Estimated Yield Formula.
\59\See F. Fabozzi, supra note 42 at 71-72.
\60\Letter from Kathryn B. McGrath, Director, Division of
Investment Management, to David Silver, President, Investment
Company Institute (Apr. 17, 1990). A copy of this letter is
contained in File No. S7-32-95.
\61\Letter from Craig S. Tyle, Associate General Counsel,
Investment Company Institute, supra note 27.
[[Page 61460]]
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III. General Request for Comments
Any interested persons wishing to submit written comments on the
rule and form changes that are the subject of this release, to suggest
additional changes, or to submit comments on other matters that might
have an effect on the proposals contained in this release, are
requested to do so.
IV. Cost/Benefit Analysis
The rule and form changes proposed today are intended to improve
information regarding the estimated yield of UITs provided to investors
by requiring that yield be uniformly calculated in a manner reasonably
likely to provide a ``best estimate'' of the return in an investment in
a UIT. The Commission believes that any resulting increase in the
expenses of UITs and their sponsors will be small, particularly in
relation to the benefit of preventing the advertisement of misleading
or inaccurate information.
The proposed formula is not expected to be significantly more
costly to calculate than current formulas used in connection with UIT
offerings. The proposed amendments therefore should result in little
increase in the cost of calculating or advertising performance
information. Converting to the use of a new formula (e.g.,
reprogramming computers) would involve certain costs, but the costs of
any conversion should be outweighed by the benefits of more accurate
UIT yield figures.
V. Summary of Initial Regulatory Flexibility Act Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis in accordance with 5 U.S.C. 603 regarding the proposed
amendments. The analysis reiterates the reasons and objectives for the
proposed amendments discussed above in this Release. The analysis also
describes the legal basis for the proposal and discusses its effect on
small entities as defined by the 1940 Act. In addition, the analysis
considers several alternatives to the proposed amendments such as
requiring a trust to calculate its IRR. The analysis notes, however,
that these alternatives would not be less costly than the proposed
Estimated Yield Formula. The analysis also notes that the proposed
Estimated Yield Formula is based on a proposal submitted by the UIT
industry. Other aggregate cost-benefit information reflected in the
``Cost/Benefit Analysis'' section of this release also is reflected in
the analysis. A copy of the analysis may be obtained by contacting
Anthony R. Bosch, Office of Disclosure and Investment Adviser
Regulation, Division of Investment Management, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
VI. Paperwork Reduction Act
Certain provisions of the proposed rule and form amendments contain
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995 [44 U.S.C. 3501 et seq.], and the
Commission has submitted the rule and form amendments to the Office of
Management and Budget for review in accordance with 44 U.S.C. 3507(d).
The title for the collection of information is ``Amendments to
Regulation C, Rule 34b-1, and Form S-6.'' The Supporting Statement to
the Paperwork Reduction Act submission notes that the proposed
amendments would amend Form S-6, rule 482, and rule 34b-1 to require
certain UITs to use a uniform formula to calculate yields quoted in
their prospectuses, advertisements, and sales literature and that the
proposed amendments are designed to enhance the ability of prospective
investors to make informed investment decisions.
Proposed amendments to Form S-6, Regulation C, and rule 34b-1 would
have a negligible effect on the annual reporting and cost burden of
UITs. Because most UITs currently calculate yield quoted in their
prospectuses, advertisements, and sales literature, the proposed
amendments should not significantly increase the reporting and cost
burdens in connection with UIT offerings. Form S-6 is used for
registration of securities under the 1933 Act by UITs registered under
the 1940 Act. UITs file approximately 3263 registration statements on
Form S-6 annually. Form S-6 requires an estimated 35 reporting burden
hours resulting from the required collection of information. Rule 34b-1
under the 1940 Act governs sales material that accompany or follow the
delivery of a statutory prospectus. Approximately 287 respondents
(including UITs) each file approximately five responses annually
pursuant to rule 34b-1. The recordkeeping burden from rule 34b-1
requires approximately 2.4 hours per response resulting from the
required collection of information. Regulation C provides standard
instructions to guide registrants filing registration statements under
the 1933 Act. Regulation C is assigned one burden hour for
administrative convenience because the rule simply prescribes the
disclosure that must appear in other filings under the 1933 Act.
The Commission requests specific comment concerning: whether the
proposed collection of information is necessary for the proper
performance of the function of the Commission, including whether the
information shall have practical utility; on the accuracy of the
Commission's estimate of the burden of the proposed collection of
information; on the quality, utility, and clarity of the information to
be collected; and whether the burden of collection of information on
those who are to respond, including through the use of automated
collection techniques or other forms of information technology may be
minimized.
Persons desiring to submit comments on the collection of
information requirements should direct them to the Office of Management
and Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
D.C. 20503, and should also send a copy of their comments to Jonathan
G. Katz, Secretary, Securities and Exchange Commission, 450 5th Street,
Washington, D.C. 20549 with reference to File No. S7-32-95. The Office
of Management and Budget is required to make a decision concerning the
collections of information between 30 and 60 days after publication, so
a comment to the Office of Management and Budget is best assured of
having its full affect if the Office of Management and Budget receives
it within 30 days of publication.
VII. Text of Proposed Rule and Form Amendments
List of Subjects
17 CFR Parts 230 and 239
Reporting and recordkeeping requirements, Securities.
17 CFR Part 270
Investment companies, Reporting and recordkeeping requirements,
Securities.
For the reasons set out in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is proposed to be amended as follows:
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
1. The authority citation for Part 230 continues to read in part as
follows:
Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c,
78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 78t, 80a-8, 80a-29, 80a-30,
and 80a-37, unless otherwise noted.
* * * * *
2. By amending Sec. 230.482 by removing the comma at the end of
paragraphs (a)(1), (a)(2), (a)(3), and (a)(4) and in its place adding a
semicolon; by
[[Page 61461]]
removing the ``, and'' at the end of paragraph (a)(5) and in its place
adding a semicolon; by removing the period at the end of paragraph
(a)(7) and in its place adding ``; and''; by adding paragraph (a)(8)
before the note; by redesignating paragraph (f) as paragraph (g); and
by adding paragraph (f) to read as follows:
Sec. 230.482 Advertising by an investment company as satisfying
requirements of section 10.
(a) * * *
(8) In the case of an advertisement of a Fixed Income UIT, defined
in Instruction 1 to Form S-6 under the Act, (Sec. 239.16 of this
chapter), containing a quotation of Estimated Yield, defined in Form S-
6, or other similar quotation purporting to demonstrate the income
earned or distributions made or to be made by the trust, shall also
include a legend disclosing that the Estimated Yield quoted is an
estimate of the rate of return an investor holding a unit for the
expected life of the trust may receive, actual return to the investor
may vary from the estimate, and that an investor's units, when
redeemed, may be worth more or less than their original cost.
* * * * *
(f) In the case of a Fixed Income UIT, any advertisement containing
a quotation of yield, or other similar quotation purporting to
demonstrate the income earned or distributions made or to be made by
the trust, shall also include a quotation of Estimated Yield that:
(1) Is based on the method of computation prescribed in Form S-6;
and
(2) Identifies the date in which an investment in the trust would
result in the advertised Estimated Yield.
* * * * *
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
3. The authority citation for Part 239 continues to read in part as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 78l,
78m, 78n, 78o(d), 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m,
79n, 79q, 79t, 80a-8, 80a-29, 80a-30 and 80a-37, unless otherwise
noted.
* * * * *
4. By amending Form S-6 (referenced in Sec. 239.16) by adding
paragraph (f) to Instruction 1 of the Instructions As To The Prospectus
to read as follows:
Note: The text of Form S-6 does not and the amendments will not
appear in the Code of Federal Regulations.
Form S-6
* * * * *
Instructions as to the Prospectus
Instruction 1. Information to be Contained in Prospectus.
* * * * *
(f) Information Concerning Registrant's Performance.
Estimated Yield. In the case of a trust that invests
substantially all of its assets in bonds and other debt instruments,
preferred stock, or a combination of these types of securities
(``Fixed Income UIT''):
(1) Furnish the trust's estimated yield to maturity (``Estimated
Yield'') calculated as of a day reasonably close to the effective
date of the registration statement or the commencement of the
offering:
Estimated Yield = [(a-b) * c] - x
Where,
a = sum of (market value of each security * yield to maturity of
each security * time to maturity of each security)/sum of (market
value of each security * time to maturity of each security)
b = total annual expenses of the trust/net asset value of the trust
c = 1 - sales load
[GRAPHIC][TIFF OMITTED]TP29NO95.017
r = (a-b) * c
n = number of annual periods until amortization date.
(2) Provide a statement that the trust's Estimated Yield is
calculated following a SEC-prescribed formula designed to estimate
the yield an investor holding a unit for the expected life of the
trust may receive, but that actual investor experience may be
different.
(3) If the trust provides an estimated rate of return calculated
using a different method, provide a brief description of the
relevant differences between the other rate of return and the
trust's Estimated Yield.
Instructions
Yield to Maturity
1. In determining the yield to maturity and time to maturity of
each security in ``a'', consider the maturity of a security with a
call provision(s) as the date with the lowest resulting yield to
call, yield to par option, or yield to maturity pursuant to rule G-
15 of the Municipal Securities Rulemaking Board.
2. In determining the yield to maturity of each security in
``a'', subtract from the amount of each security's first coupon
payment and add to the amount of each security's last coupon payment
the amount of accrued interest of that security as of the date of
deposit. (This accrued interest also should be included in the price
of each bond.) In calculating Estimated Yield subsequent to the
initial offering of the trust, use the same amount of accrued
interest. In the case of a trust in which all accrued interest at
the date of deposit is paid by the sponsor or a person other than a
unitholder, this Instruction does not apply.
3. In determining the market value of each security and the net
asset value of the trust in ``a'' and ``b'' respectively, include
the amount of accrued interest or any advance of accrued interest
that is paid by unit holders upon purchase of the units.
4. In determining the net asset value of the trust in ``b'', do
not include the amount of repayments of principal of securities held
in a trust's portfolio that are to be distributed to unitholders.
5. In the case of a tax exempt obligation issued without
original issue discount and having a current market discount, use
the coupon rate of interest in lieu of the yield to maturity. Where,
in the case of a tax exempt obligation with original issue discount,
and the discount based on the current market value exceeds the then-
remaining portion of original issue discount (market discount), the
yield to maturity is the imputed rate based on the original issue
discount calculation. Where, in the case of a tax exempt obligation
with original issue discount, and the discount based on the current
market value is less than the then-remaining portion of original
issue discount (market premium), the yield to maturity should be
based on the market value.
6. In the case of a trust that invests in units of other trusts
for which an Estimated Yield is not available from the sponsor,
determine the yield to maturity of the other trust using the other
trust's average dollar price, average coupon rate, and average yield
to maturity. Determine the other trust's average dollar price by
dividing the sum of the net asset values of the bonds in the other
trust by the sum of the par values of the bonds. Determine the other
trust's average coupon rate and average yield to maturity by
weighting the coupon rate and yield to maturity of each bond in the
other trust by its market value.
Sales Load
7. Sales load in ``c'' and ``x'' is the maximum sales load
stated as a percentage of the offering price of units. In the case
of a deferred sales load, the maximum sales load is the aggregate of
all installment loads, stated as a percentage of the offering price.
8. In determining the amortization date of a trust in ``n'',
calculate an average, weighted by market value, of the expected
lives of the bonds in the trust. To calculate the expected life of
each bond in the trust:
(a) For bonds priced at par or at a discount and for bonds
priced at a premium where the yield to maturity is less than or
equal to yield to call (as determined by Instruction 1) plus .4% (40
basis points), use the maturity date of the bond(s); and
(b) For bonds priced at a premium where yield to maturity is
greater than yield to call (as determined by Instruction 1) plus .4%
(40 basis points), use the call date of the bond(s).
Expenses
9. A trust that has different Estimated Yields for different
classes of unit holders, (e.g., because of different distribution
payment options that result in different expense ratios) may include
a quotation of more than one Estimated Yield. If such a trust quotes
a single yield, in determining the total annual expenses of the
trust in ``b'', assume the highest expense ratio is applicable to
all of the assets of the trust.
[[Page 61462]]
Tax Equivalent Yield
10. If a trust quotes a tax equivalent yield, calculate tax
equivalent yield by dividing that portion of the yield of the trust
that is tax exempt by one minus a stated income tax rate and adding
to the product that portion, if any, of the yield of the trust that
is not tax exempt. Any quotation of tax equivalent yield in the
trust's prospectus, advertisements, or sales literature, should be
accompanied by a quotation of Estimated Yield that is given equal
prominence.
Secondary Market Sales
11. In calculating Estimated Yield subsequent to the initial
offering of the trust, use the maximum public offering price at
which the trust's sponsor is willing to sell trust units to an
investor and the maximum sales load that may be charged to an
investor for trust units.
Preferred Stock, Asset-Backed Securities, and Adjustable-Rate
Securities
12. In the case of preferred stock:
(a) In lieu of yield to maturity in determining ``a'', use the
preferred stock's interest rate calculated by dividing the
security's dividend by its market value and by annualizing on a
straight-line method, (e.g., multiply a quarterly payment rate by
4);
(b) In determining the amortization date in ``n'', in the case
of preferred stock that can be converted to common stock or is
subject to a redemption feature, use as the security's expected
life: the lesser of the time period to its conversion date, its
redemption date or the trust's termination date; and
(c) In determining the amortization date in ``n'', in the case
of all other preferred stock, use the trust's termination date as
the security's expected life.
13. In determining each asset-backed security's yield to
maturity in ``a'' and in determining each asset-backed security's
amortization period in ``n'', in lieu of its maturity date, use the
same ``expected life'' of the security used for calculating the
price of the security as part of the trust's net asset value.
14. (a) For adjustable-rate securities not subject to a demand
feature, use the next reset date as the maturity date for
calculating yield to maturity in ``a''; and
(b) For adjustable-rate securities subject to a demand feature,
use the time remaining until the next demand date or the next reset
date, whichever is less, as the maturity date for calculating yield
to maturity in ``a''.
15. In the case of a trust that invests some of its assets in
preferred stock, asset-backed securities, or adjustable-rate
securities, in addition to the disclosure required by paragraph
(f)(2) of Form S-6, disclose that some of the trust's assets (____%)
is invested in (preferred stock, asset-backed securities, or
adjustable-rate securities), and, because the continued payment of
interest or other income (and return of principal for asset-backed
securities) for these types of securities cannot be predicted, this
portion of the trust's yield will vary and, as a result, actual
investor experience will be different.
16. In the case of a trust that invests substantially all of its
assets in preferred stock, asset-backed securities, or adjustable-
rate securities refer to its yield, calculated pursuant to the
Estimated Yield Formula, as ``Current Yield''; and, in addition to
the disclosure required by paragraph (f)(2) of Form S-6, disclose
that, because the continued payment of interest or other income (and
return of principal for asset-backed securities) for these types of
securities cannot be predicted, the trust's yield will vary and, as
a result, actual investor experience will be different. Provide a
cross-reference to the part of the prospectus in which the portfolio
securities are described.
17. In the case of a trust that invests substantially all or a
portion of its assets in preferred stock, asset-backed securities,
or adjustable-rate securities and provides a yield in its
advertisements pursuant to Rule 482 under the Act [17 CFR 230.482],
or in its sales literature in compliance with Rule 34b-1 under the
1940 Act [17 CFR 270.34b-1], in lieu of the disclosure required by
Rule 482(a)(8) under the Act [17 CFR 230.482(a)(8)] or Rule 34b-
1(c)(1) under the 1940 Act [17 CFR 270.34b-1(c)(1)] provide the
disclosure required by Instructions 15 and 16 (excluding the cross-
reference) as appropriate.
Securities Denominated in Foreign Currencies
18. In the case of a security denominated in a foreign currency,
convert its market value into U.S. dollars at the exchange rate in
effect at the time of calculation.
Additional
19. Determine Estimated Yield to the nearest hundredth of one
percent. Use calculations using market price, accrued interest,
annual periods, expenses, net asset value, or number of years to the
nearest one thousandth. Base calculations using yield to maturity,
coupon rate, or sales load to the nearest thousandth of one percent.
20. In the case of a post-effective amendment to the trust's
registration statement, calculate the trust's Estimated Yield as of
a date reasonably close to the date of filing of the post-effective
amendment.
* * * * *
PART 270--GENERAL RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF
1940
5. The authority citation for Part 270 continues to read, in part,
as follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-37, 80a-39 unless
otherwise noted;
* * * * *
6. By revising Sec. 270.34b-1 to read as follows:
Sec. 270.34b-1 Sales literature deemed to be misleading.
Any advertisement, pamphlet, circular, form letter, or other sales
literature addressed to or intended for distribution to prospective
investors that is required to be filed with the Commission by section
24(b) of the Act [15 U.S.C. 80a-24(b)] (``sales literature'') shall
have omitted to state a fact necessary in order to make the statements
made therein not materially misleading unless the sales literature
includes the information specified in paragraphs (a), (b) and (c) of
this section.
(a) Sales literature for a money market fund shall contain the
information required by paragraph (a)(7) of Sec. 230.482 of this
chapter.
(b) Except as provided in paragraph (d) of this section, any sales
literature containing performance data of an open-end management
investment company or a separate account registered under the Act as a
unit investment trust offering variable annuity contracts shall also
include:
(1) The disclosure required by paragraph (a)(6) of Sec. 230.482 of
this chapter; and
(2) The following additional performance data, which shall meet the
currentness requirements of paragraph (g) of Sec. 230.482 of this
chapter:
(i) Except in the case of a money market fund, the total return
information required by paragraph (e)(3) of Sec. 230.482 of this
chapter;
(ii) In the case of sales literature containing a quotation of
yield or other similar quotation purporting to demonstrate the income
earned or distributions made by the company, a quotation of current
yield specified by paragraph (e)(1) of Sec. 230.482 of this chapter,
or, in the case of a money market fund, paragraph (d)(1) of
Sec. 230.482 of this chapter; and
(iii) In the case of sales literature containing a quotation of tax
equivalent yield or other similar quotation purporting to demonstrate
the tax equivalent of income earned or distributions made by the
company, a quotation of tax equivalent yield specified by paragraph
(e)(2) and current yield specified by paragraph (e)(1) of Sec. 230.482
of this chapter, or, in the case of a money market fund, paragraph
(d)(1) of Sec. 230.482 of this chapter.
(c) Any sales literature containing a quotation of yield, or other
similar quotation purporting to demonstrate the income earned or
distributions made or to be made by a Fixed Income UIT defined in
Instruction 1 to Form S-6 under the Securities Act of 1933,
(Sec. 239.16 of this chapter), shall also include:
(1) The disclosure required by paragraph (a)(8) of Sec. 230.482 of
this chapter; and
(2) A quotation of Estimated Yield specified by paragraph (f) of
Sec. 230.482 of this chapter which shall meet the currentness
requirements of paragraph (g) of Sec. 230.482 of this chapter.
[[Page 61463]]
(d) The requirements specified in paragraph (b) of this section
shall not apply to any quarterly, semi-annual or annual report to
shareholders under section 30 of the Act [15 U.S.C. 80a-29], containing
performance data for a period commencing no earlier than the first day
of the period covered by the report; nor shall the requirements of
paragraphs (e)(3)(ii) and (g) of Sec. 230.482 (e)(3)(ii) and (g) apply
to any such periodic report containing any other performance data.
Note to Sec. 270.34b-1: Sales literature of an open-end
management company or a separate account (except that of a money
market fund) containing a quotation of yield or tax equivalent yield
must also contain the total return information. In the case of sales
literature, the currentness provisions apply from the date of
distribution and not the date of submission for publication.
Dated: November 22, 1995.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29109 Filed 11-28-95; 8:45 am]
BILLING CODE 8010-01-P
