[Federal Register Volume 61, Number 237 (Monday, December 9, 1996)]
[Notices]
[Pages 64931-64933]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31150]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-22363; 812-10066]
OCC Distributors, et al.; Notice of Application
December 2, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS: OCC Distributors (the ``Sponsor'') and Qualified Unit
Investment Trust Liquid Series (``QUILTS''), Equity Strategic Ten
Series; QUILTS, Equity Strategic Five Series; QUILTS, Opportunity Trust
Series; QUILTS, U.S. Treasury Trust Series; QUILTS, Corporate Trust
Series; and QUILTS, Municipal Insured Series (the ``Trusts'').
RELEVANT ACT SECTIONS: Order requested pursuant to section 6(c) for
exemptions from sections 2(a)(32), 2(a)(35), 22(d), and 26(a)(2) of the
Act and rule 22c-1 thereunder, and pursuant to section 11(a) to
supersede a prior order (the ``Prior Order'') \1\ for an exemption from
section 11c).
\1\ Quest for Value Distributors, Investment Company Act Release
Nos. 21079 (May 17, 1995) (notice) and 21133 (June 13, 1995)
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SUMMARY OF APPLICATION: Applicants seek to impose sales charges on a
deferred basis, waive the deferred sales charge in certain cases, and
offer exchange and rollover privileges at a reduced sales charge that
would extend to units having deferred sales charges.
FILING DATE: The application was filed on March 28, 1996 and amended on
July 16, 1996. Applicants have agreed to file an additional amendment,
the substance of which is incorporated herein, 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
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on December 27,
1996 and should be accompanied by proof of service on
[[Page 64932]]
applicants, in the form of an affidavit or, for layers, a certificate
of service. Hearing requests should state the nature of the writer's
request, the reason for the request, and the issues contested. Persons
may request notification of a hearing by writing to the SEC's
Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street N.W., Washington, D.C.
20549. Applicants, OCC Distributors, Two World Financial Center, 225
Liberty Street, New York, New York 10080-6116, Attention: Susan A.
Murphy.
FOR FURTHER INFORMATION CONTACT:
David W. Grim, Staff Attorney, at (202) 942-0571, or Mercer E. Bullard,
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.
Applicants' Representations
1. Each of the Trusts is a unit investment trust registered as an
investment company under the Act and is sponsored by the Sponsor. Each
of the trusts consists of one or more series of separate unit
investment trusts issuing securities registered under the Securities
Act of 1933 (``Series''). Applicants request that the relief sought
herein apply to any future trusts sponsored by the Sponsor, and any
future series of such trusts.
2. Each Series is created by a trust indenture among the Sponsor, a
banking institution or trust company as trustee, and an evaluator. The
Sponsor acquires a portfolio of securities which it deposits with the
trustee in exchange for certificates representing units of fractional
undivided interest in the deposited portfolio (``Units''). The Units
are then offered to the public through the Sponsor, underwriters, and
dealers at a public offering price which, during the initial offering
period, is based upon the aggregate offering side evaluation of the
underlying securities plus a 0.85% to 4.50% of the public offering
price, generally depending on the terms of the underlying securities.
The maximum charge is usually subject to reduction in compliance with
rule 22d-1, under certain stated circumstances disclosed in the
prospectus, such as for a volume discount purchase.
3. Applicants seek a order under section 6(c) exempting them from
sections 2(a)(32), 2(a)(35), 22(d), and 26(a)(2) of the Act, and rule
22c-1 thereunder, to the extent necessary to permit them to impose a
deferred sales charge (``DSC'') on Units, and vary or waive the DSC
under certain circumstances. Under applicants' proposal, the Sponsor
will determine the maximum amount of the sales charge per Unit. The
Sponsor will have the discretion to defer the collection of all of part
of such sales charge over a period (the ``Collection Period'')
subsequent to the settlement date for the purchase of Units. The
Sponsor will in no event add to the deferred amount of the sales charge
any additional amount for interest or any similar or related charge to
reflect or adjust for the ``time value of money,'' and the DSC will not
apply to increases in the value per Unit after the date of purchase.
4. The Sponsor anticipates collecting a portion of the total sales
charge ``up-front,'' i.e., immediately upon purchase of Trust Units.
The balance of the sales charge per Trust Unit as of the initial date
of deposit will be collected over the Collection Period for the
particular Series. A ratable portion of the sales charge remaining to
be collected will be educated from each unitholder's distributions on
the Units (``Distribution Deductions'') during the Collection Period
until the total amount of the sales charge per Unit is collected. To
the extent that distribution income is sufficient to make the requisite
Distribution Deductions, the trustee will withdraw the appropriate
amount of the DSC from such distribution income and will pay such
amount directly to the Sponsor. If distribution income is insufficient
to pay a DSC installment, the trustee, pursuant to the powers granted
in the trust indenture, will have the ability to sell portfolio
securities in an amount necessary to provide the requisite payments.
5. It is the Sponsor's current intention to deduct any amount of
unpaid DSC expense from the proceeds of any redemption of Units or any
sale of Units to the Sponsor. For purposes of calculating the amount of
the DSC due upon redemption or sale of Units, it will be assumed that
Units on which the sales charge has been paid in full are liquidated
first. Any Units liquidated over and above such amounts will be subject
to the DSC, which will be applied on the assumption that Units held for
the longest time are redeemed first.
6. The Sponsor may adopt a procedure of waiving the DSC in
connection with redemptions or sales of Units under certain
circumstances. Any such waiver will be disclosed in the prospectus for
each Series subject to the waiver, and will be implemented in
accordance with rule 22d-1.
7. Applicants also request an order under section 11(a) of the Act
to supersede the Prior Order granting an exemption from section 11(c)
of the Act. Applicants propose to offer an exchange privilege to
unitholders of the Trusts at a reduced sales charge (the ``Exchange
Privilege''). Unitholders would be able to exchange any of their Units
for Units of one or more available Series of the Trusts (an ``Exchange
Trust''). Applicants also propose to offer a rollover privilege to
unitholders of the Trusts at a reduced sales charge (the ``Rollover
Privilege''). Unitholders would be able to ``roll over'' their Units in
a Series which is terminating for Units of one or more new Series of
the Trusts (a ``Rollover Trust''). Applicants seek to supersede the
Prior Order in order to create a Exchange Privilege and Rollover
Privilege that would extend to all exchanges of Units sold either with
a fixed sales charge or with a DSC for Units of an Exchange Trust or
Rollover Trust sold either with a fixed sales charge or with a DSC.
8. To exercise the Exchange Privilege or Rollover Privilege, a
unitholder must notify the Sponsor. Exercise of the Exchange Privilege
or Rollover Privilege is subject to the following conditions: (a) the
Sponsor must be maintaining a secondary market in Units of the Trust
held by the unitholder and Units of the Trust to be acquired in the
exchange, (b) at the time of the exchange, there must be Units of the
Exchange Trust or Rollover Trust to be acquired available for sale, and
(c) exchanges will be in whole units only.
9. While Units of an applicable Series are normally sold on the
secondary market with maximum sales charges ranging from 0.85% to 4.50%
of the public offering price, the sales charge on Units acquired
pursuant to the Exchange Privilege or Rollover Privilege will generally
be reduced. In any event, an investor who purchases units under the
exchange or rollover option will pay a lower sales charge than that
which would be paid by a new investor. An adjustment will be made if
Units of any Series are exchanged within five months of their
acquisition for Units of a Series with a higher sales charge. In this
case, the exchange fee will be the greater of the applicable reduced
sales charges previously collected and the normal sales charge of the
Unit being acquired.
Applicants' Legal Analysis
1. Under section 6(c), the SEC may exempt any person or transaction
from any provision of the Act or any rule thereunder to the extent that
such exemption is necessary or appropriate in the public interest and
consistent
[[Page 64933]]
with the protection of investors and the purposes fairly intended by
the policy and provisions of the Act. Applicants believe that their
proposal meets these standards.
2. Section 4(2) of the Act defines a ``unit investment trust'' as
an investment company which ``issues only redeemable securities.''
Section 2(a)(32) defines a ``redeemable security'' as a security that,
upon its presentation to the issuer, entitles the unitholder to receive
approximately his or her proportionate share of the issuer's current
net assets, or the cash equivalent of those assets. Applicants state
that to avoid uncertainty regarding whether the imposition of the DSC
in the manner described in the application would cause Units of the
Trust to fall outside the definition of ``redeemable security,''
applicants request an exemption from the operation of section 2(a)(32)
to the extent necessary to permit implementation of the DSC under the
deferred sales charge program.
3. Section 2(a)(35) defines the term ``sales load'' to be the
difference between the sales price and the portion of the proceeds
invested by the depositor or trustee. Therefore, applicants submit that
this arrangement is within the section 2(a)(35) definition of sales
load, but for the timing of the imposition of the charge.
4. Rule 22c-1, promulgated pursuant to the SEC's authority under
section 22(c) of the Act, requires that the price of a redeemable
security issued by an investment company for purposes of sale,
redemption, and repurchase be based on the security's current net asset
value. Applicants note that the DSC would be deducted at the time of
redemption of repurchase from the unitholder's proportionate
liquidation proceeds. Applicants state that in order to avoid any
possibility that questions might be raised as to the potential
applicability of rule 22c-1, applicants request an exemption from the
operation of the provisions of the rule to the extent necessary or
appropriate to permit applicants to implement the DSC under the
proposed deferred sales charge program.
5. Section 22(d) requires an investment company and its principal
underwriter and dealer to sell securities only at a current public
offering price described in the investment company's prospectus. Sales
loads historically were deemed to be subject to the provisions of
section 22(d) because they were traditionally a component of the public
offering price; hence all investors were charged the same sales load.
Rule 22d-1 was adopted to permit the sale of redeemable securities at
prices which reflect scheduled variations in the sales load. Applicants
state that in the interest of clarity, applicants request an exemption
from the provisions of section 22(d) in order to permit scheduled
variations or waivers of the DSC under certain circumstances.
6. Section 26(a)(2), in relevant part, prohibits a trustee or
custodian of a unit investment trust from collecting from the Trust as
an expense any payment to a depositor or principal underwriter thereof.
Applicants state that in order to avoid any possibility that questions
may be raised as to the propriety of the trustee disbursing sales
charges to the Sponsor, applicants request an exemption from section
26(a)(2)(C) to the extent necessary to permit the trustee to collect
deductions and disburse them to the Sponsor as contemplated by the
deferred sales charge program.
7. Section 11(c) prohibits any offers of exchange of the securities
of a registered unit investment trust for the securities of any other
investment company, unless the terms of the offer have been approved by
the SEC under section 11(a). Applicants submit that certain savings in
sales related expenses involving repeat investors may appropriately be
passed along to such investors, which savings will be recognized by a
reduction in the sales charge of the Unit exchanged into. Applicants
believe that whether the sales charge on the Unit exchanged is
collected up-front or on a deferred basis in no way affects the nature
of these savings.
8. Applicants represent that unitholders will not be induced or
encouraged to participate in the Exchange or Rollover Privilege through
an active advertising or sales campaign. The Sponsor recognizes its
responsibility to its customers against generating excessive
commissions through churning and represents that the sales charge
collected will not be a significant economic incentive to salesman to
promote inappropriately the Exchange or Rollover Privilege. The Sponsor
also believes that the operation and implementation of the DSC program
will be adequately disclosed and explained to potential investors as
well as unitholders.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. Whenever the Exchange Privilege or Rollover Privilege is to be
terminated or its terms are to be amended materially, any unitholder of
a security subject to that privilege will be given prominent notice of
the impending termination or amendment at least 60 days prior to the
date of termination or the effective date of the amendment, provided
that: (a) no such notice need be given if the only material effect of
an amendment is to reduce or eliminate the sales charge payable at the
time of an exchange, to add one or more new Series eligible for the
Exchange Privilege or Rollover Privilege, or to delete a Series which
has terminated; and (b) no notice need be given if, under extraordinary
circumstances, either (i) there is a suspension of the redemption of
Units of an Exchange Trust or Rollover Trust under section 22(e) of the
Act and the rules and regulations promulgated thereunder, or (ii) an
Exchange Trust or Rollover Trust temporarily delays or ceases the sale
of its Units because it is unable to invest amounts effectively in
accordance with applicable investment objectives, policies, and
restrictions.
2. An investor who purchases Units under the Exchange Privilege or
Rollover Privilege will pay a lower sales charge than that which would
be paid for the Units by a new investor. The reduced sales charge will
be reasonably related to the expense of providing such service, and may
include an amount that will fairly and adequately compensate the
Sponsor.
3. The prospectus of each Series and any sales literature or
advertising that mentions the existence of the Exchange Privilege or
the Rollover Privilege will disclose that the Exchange Privilege and
the Rollover Privilege are subject to termination and that their terms
are subject to change.
4. Each Series offering Units subject to a DSC will include in its
prospectus the table required by item 2 of Form N-1A (modified as
appropriate to reflect the differences between unit investment trusts
and open-end management investment companies) and a schedule setting
forth the number and date of each installment payment.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-31150 Filed 12-6-96; 8:45 am]
BILLING CODE 6717-01-M
