[Federal Register Volume 65, Number 24 (Friday, February 4, 2000)]
[Notices]
[Pages 5711-5713]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-2450]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 24269; 812-11630]
Salomon Smith Barney Inc., et al.; Notice of Application
January 28, 2000.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of an application under section 6(c) of the Investment
Company Act of 1940 (the ``Act'') for an exemption from section
12(d)(3) of the Act, and under sections 6(c) and 17(b) of the Act for
an exemption from section 17(a) of the Act.
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SUMMARY OF APPLICATION: Applicants request an order that would permit
(a) certain series of unit investment trusts to invest up to 10.5%,
certain other series to invest up to 15.5%, and certain other series to
invest up to 20.5% of their respective total assets in securities of
issuers that derived more than 15% of their gross revenues in their
most recent fiscal year from securities related activities; and (b)
certain series to sell portfolio securities to certain new series.
APPLICANTS: Salomon Smith Barney Inc. (the ``Sponsor''), The Uncommon
Values Trust, Equity Focus Trusts, Angels with Dirty Faces Trust, The
CountryFund Opportunity Trust, Robinson-Humphrey Annual Themes Series
and certain other future unit investment trusts sponsored by the
Sponsor (collectively, the ``Trusts'' and the various series of the
Trusts, each a ``Series'').
FILING DATES: The application was filed on May 26, 1999. Applicants
have agreed to file an amendment to the application during this notice
period, the substance of which is reflected in this notice.
HEARING OR NOTIFICATION OF HEARING: An order granting the requested
relief 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 February
22, 2000; and should be accompanied by proof of service on applicants
in the form of an affidavit or, for lawyers, a certificate of service.
Hearing requests should state the nature of the writer's interest, the
reason for the request, and the issues contested. Persons who wish to
be notified of a hearing may request notification by writing to the
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, DC
20549-0609. Applicants, 7 World Trade Center, 36th Floor, New York, NY
10048.
FOR FURTHER INFORMATION CONTACT: Michael W. Mundt, Branch Chief, at
(202) 942-0564 (Office of Investment Company Regulation, Division of
Investment Management).
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, N.W., Washington, DC
20549-0102 (tel. 202-942-8090).
Applicants' Representations
1. Each Trust is a unit investment trust registered under the Act
with multiple series. Each Trust is created by a trust indenture
between the Trust, the Sponsor, and the Chase Manhattan Bank, which is
a bank within the meaning of section 2(a)(5) of the Act that satisfies
the criteria in section 26(a) of the Act and is unaffiliated with the
Sponsor (the ``Trustee''). Applicants also request belief for any
future Trust sponsored by the Sponsor.\1\
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\1\ All existing Trusts that intend to rely on the order are
named as applicants. Any existing of future Trust that relies on the
order in the future will comply with the terms and conditions of the
application.
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2. Certain Series of the Trusts will hold a portfolio of common
stocks of growth companies (each such Series, a ``Growth Series''). The
investment objective of each Growth Series is to seek capital
appreciation. Other Series (each an ``Index Series'') will hold a
portfolio of common stocks which represent a portion of a specific
index. The investment objective of each Index Series is to seek a
greater total return than that achieved by the stocks comprising the
entire related index over the life of the Index Series.
3. Certain of the Index Series (each, a ``Ten Series'') will invest
approximately 10%, but no more than 10.5% of their total assets in each
of the ten common stocks in the Dow Jones Industrial Average
(``DJIA''), the Financial Times Industrial Ordinary Share Index (``FT
Index''), the Nikkei 225 Index (the ``Nikkei Index''), or the Hang Seng
Index (each an ``Index,'' and together the ``Indexes''), as the case
may be, having the highest dividend yields no more than three business
days prior to the Ten Series' initial date of deposit. Certain other
Index Series (each, a ``Five Series'') will invest approximately 20%,
but in no event more than 20.5%, of their total assets in each of the
five lowest dollar price per share stocks of the ten common stocks in
one of the Indexes, as the case may be, having the highest dividend
yields no more than three business days prior to the Five Series'
initial date of deposit. The other Index Series (each a ``Ten/A+
Series'') will invest approximately 50% of their total assets in the
ten common stocks contained in the DJIA having the highest dividend
yields and 50% in the common stocks contained in the DJIA having a
quality ranking of A+ by Standard & Poor's (``S&P'') no more than three
business days prior to the Ten/A+ Series initial date of deposit.\2\
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\2\ Applicants state that the number of common stocks listed on
the DJIA that have received S&P ratings of A+ has ranged from six to
eleven stocks over the past 25 years.
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4. Applicants state that each of the Indexes is a recognized
indicator of the stock market in its respective country, and that S&P
has been ranking common stock for quality since 1956. \3\ The
publishers of the Indexes and S&P are not affiliated with any Index
Series or the Sponsor, and do not participate in any way in the
creation of any Index Series or the selection of its stocks. The common
stocks included in the Indexes may include stocks of issuers that
derive more than 15% of their gross revenues from securities related
activities, as that term is defined in rule 12d3-1 under the Act, as
discussed below (``Securities Related Issuers'').
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\3\ The DJIA, which is owned by Dow Jones & Company, Inc.,
comprises 30 widely-held common stocks listed on the New York Stock
Exchange, which are chosen by the editors of The Wall Street
Journal. The FT Index comprises 30 widely-held common stocks listed
on the London Stock Exchange, which are chosen by the editors of The
Financial Times. The Nikkei Index comprises 225 common stocks listed
on the Tokyo Stock Exchange. The Hang Seng index comprises 33 common
stocks listed on the Stock Exchange of Kong, Ltd. ``A+'' is the
highest S&P ranking for earning and dividends of common stock and is
based on per-share earnings and dividend records of the most recent
ten years.
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5. The securities deposited in each Index Series will be chosen
solely according to the formulas described below, and will not
necessarily reflect the research opinions or buy or sell
recommendations of the Sponsor. The Sponsor is authorized to determine
the date of deposit, to purchase securities for deposit in the Index
Series, and to
[[Page 5712]]
supervise each Index Series' portfolio. The Sponsor will have no
discretion as to which securities are purchased.
6. The Index Series' portfolios will not be actively managed. Sales
of portfolio securities will be made in connection with redemptions of
units, payment of expenses, and the termination of an Index Series. The
Sponsor has no discretion as to when securities will be sold except
that it is authorized to sell securities in extremely limited
circumstances, such as when an issuer defaults on the payment of any
outstanding obligations, or when the price of a security has declined
to such an extent or other credit factors exist so that in the opinion
of the Sponsor, it would be detrimental to the Index Series to retain
the securities. The adverse financial condition of an issuer will not
necessarily require the sale of its securities from an Index Series'
portfolio.
7. Certain Series have either (i) a contemplated date (``Rollover
Date'')on which unitholders in a terminating Series (``Terminating
Series'') may at their option redeem their units and receive units of a
subsequent Series of the same type (``New Series''), which will be
created on or about the Rollover Date or (ii) a contemplated date or
dates (an ``Exchange Date'') on which unitholders in an existing series
(the ``Exchange Series'') may at their option redeem their units and
receive units of a New Series which is created on or about the Exchange
Date (the Terminating Series and Exchange Series collectively, the
``Rollover Series'').
8. Certain Rollover Series may have a portfolio containing equity
securities many, if not all, of which are either (i) listed by the
Sponsor on a ``top picks'' list disseminated to customers and the
general public as securities recommended for purchase (``Top Picks
Securities'') and that have (a) a minimum market capitalization of U.S.
$1 billion and (b) had an average daily trading volume in the preceding
60 trading days of at least 50,000 shares equal in value to at least
U.S. $250,000 on a Qualified Exchange (defined below), or (ii) are not
Top Picks Securities and are actively traded (i.e., have had an average
daily trading volume in the preceding six months of at least 500 shares
equal in value to at least U.S. $25,000) on an exchange (a ``Qualified
Exchange'') which is either (a) a national securities exchange which
meets the qualifications of Section 6 of the Securities Exchange Act of
1934, (b) a foreign securities exchange (a ``Qualified Exchange'')
which meets the qualifications set out in the proposed amendment to
Rule 12d3-1(d)(6) under the Act as proposed by the SEC \4\ and which
releases daily closing prices or (c) the Nasdaq-National Market System
(``Nasdaq-NMS'') (securities meeting the preceding tests in (i) and
(ii) above are referred to as ``Qualified Securities'').
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\4\ Investment Company Act Release No. 17096 (Aug. 3, 1989)
(proposing amendments to rule 12d3-1). The proposed amended rule
defined a ``Qualified Foreign Exchange'' to mean a stock exchange in
a country other than the United States where (a) trading generally
occurred at least four days a week; (b) there were limited
restrictions on the ability of acquiring companies to trade their
holdings on the exchange; (c) the exchange had a trading volume in
stocks for the previous year of at least U.S. $7.5 billion; and (d)
the exchange had a turnover ratio for the preceding year of least
20% of its market capitalization. The version of the amended rule
that was adopted did not include the part of the proposed amendment
defining the term ``Qualified Foreign Exchange.''
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9. Applicants state that there is normally some overlap form one
year to the next in the stocks having the highest dividend yields in
each of the Indexes, as well as the DJIA stocks rated A+ by S&P. The
Sponsor anticipates that there will be some overlap from one year to
the next in the stocks selected for the portfolios of a Growth Series
that is a Rollover Series and a Growth Series that is a New Series.
Absent the requested relief, each Rollover Series would sell all of its
securities and each New Series investing in any of theses securities
would acquire them on the applicable Qualified Exchange. This procedure
would result in the unitholders of both the Rollover Series and the New
Series incurring brokerage commissions on the same securities.
Applicants' Legal Analysis
A. Purchases of Stocks of Securities Related Issuers in Excess of Rule
12d3-1 Limits
1. Section 12(d)(3) of the Act, with limited exceptions, prohibits
an investment company form acquiring any security issued by any person
who is a broker, dealer, underwriter, or investment adviser. Rule 12d3-
1 under the Act exempts the purchase of securities of a Securities
Related Issuer, provided that, among other things, immediately after
the acquisition, the acquiring company has invested not more than five
percent of the value of its total assets in securities of the
Securities Related Issuer.\5\
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\5\ Under rule 12d3-1, a Securities Related Issuer is a person
that derives more than 15% of its gross revenues from activities as
a broker, dealer, underwriter, investment adviser registered under
the Investment Advisers Act of 1940, or investment adviser to a
registered investment company.
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2. As noted above, applicants state that some of the stocks
comprising the Indexes include securities of Securities Related
Issuers. Applicants assert that, in order to comply with rule 12d3-1,
absent the requested relief, each Index Series may be precluded from
most effectively implementing its investment objective.
3. Under section 6(c), SEC may exempt classes of 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.
4. Applicants request an exemption under section 6(c) from section
12(d)(3) to permit a Ten Series to invest up to approximately 10%, but
in no event more than 10.5%, of the value of its total assets in
securities of a Securities Related Issuer, to permit a Ten/A+ series to
invest up to 15%, but in no event more than 15.5% of the value of its
total assets in securities of a Securities Related Issuer, and to
permit a Five Series to invest up to approximately 20%, but in no event
more than 20.5%, of the value of its total assets in securities of a
Securities Related Issuer.
5. Applicants state that the proposed transactions satisfy the
requirements of section 6(c). Applicants state that section 12(d)(3)
was intended to prevent investment companies from exposing their assets
to the entrepreneurial risks of securities related businesses, to
prevent potential conflict so interest, and to eliminate certain
reciprocal practices between investment companies and securities
related businesses. One potential conflict could occur if an investment
company purchased securities or other interests in a broker-dealer to
reward that broker-dealer for selling fund shares, rather than solely
on investment merit. Applicants state that this concern does not arise
in connection with the Index Series because the selection of securities
is based on certain set formulas, and neither the Index Series nor the
Sponsor has discretion in choosing the securities of a Securities
Related Issuer or the amount purchased.
6. Applicants also state that the effect of an Index Series'
purchase on the stock of a Securities Related Issuer would be de
minimis. Applicants assert that the Securities Related Issuers
represented in the Indexes are widely held and have active markets, and
that potential purchases by any Index Series would represent an
insignificant amount of the outstanding common stock and trading volume
of any of these Securities Related Issuers.
7. Another potential conflict of interest could occur if an
investment
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company directed brokerage to a broker-dealer in which the company has
invested to enhance the broker-dealer's profitability or to assist it
during financial difficulty, even though that broker-dealer may not
offer the best price and execution. To preclude this type of conflict,
applicants agree, as a condition to the order, that no company held in
a portfolio of an Index Series, nor any affiliated person of the
company, will act as a broker for any Index Series in the purchase or
sale of any security for such Series' portfolio.
B. Purchases and Sales Between Series
1. Section 17(a) of the Act prohibits an affiliated person of a
registered investment company from selling securities to, or purchasing
securities from, the company. Section 2(a)(3) of the Act defines an
`affiliated person'' of another person to include, in pertinent part,
any person directly or indirectly controlling, controlled by, or under
common control with, the other person. Each Series will have a common
sponsor. Since the Sponsor of a series may be deemed to control the
Series, all of the series may be deemed to be under common control and
affiliated persons of each other.
2. Rule 17a-7 under the Act permits registered investment advisers,
directors, and/or officers, to purchase securities from, or sell
securities to, one another at an independently determined price,
provided certain conditions are met. Applicants represent that they
will comply with all of the provisions of rule 17a-7, other than
paragraph (e).
3. Paragraph (e) of the rule requires an investment company's board
of directors to adopt and monitor certain procedures to assure
compliance with the rule. Since a unit investment trust does not have a
board of directors, the Series would be unable to comply with this
requirement.
4. Section 17(b) of the Act provides that the SEC will exempt a
proposed transaction from section 17(a) if evidence establishes that:
(a) that terms of the proposed transaction are reasonable and fair and
do not involve overreaching; (b) the proposed transaction is consistent
with the policies of the registered investment company involved; and
(c) the proposed transaction is consistent with the general purposes of
the Act. As noted above, section 6(c) of the Act provides that the SEC
may exempt classes of transactions if the exemption is necessary or
appropriate in the public interest, and consistent with the protection
of investors and the purposes fairly intended by the policy and
provisions of the Act. Applicants request relief under sections 6(c)
and 17(b) to permit any Rollover Series to sell Qualified Securities to
a New Series, and to permit the New Series to purchase the Qualified
Securities.
5. Applicants state that the proposed transactions satisfy the
standards of sections 6(c) and 17(b). Applicants represent that
purchases and sales between Series will be consistent with the policy
of each Series. Applicants state that the Qualified Securities to be
sold to a New Series will be Qualified Securities that are available
fro a Rollover Series by reason of units tendered for redemption that
day or termination of the Rollover Series. Applicants note that the
Trustee will continue its general practice of redeeming units of an
Exchange Series by selling securities in a manner that maintains the
same portfolio composition, and in the same proportions, as prior to
the sale. Applicants further state that permitting the proposes
transactions would result in savings on brokerage fees for the Series.
6. Applicants state that the condition that the Qualified
Securities must be actively traded on a Qualified Exchange protects
against overreaching. In addition, applicants state that the Sponsor
will make an initial determination that the Rollover Series and the New
Series are on the opposite side of a transaction in Qualified
Securities. The Sponsor then will certify to the Trustee, no later than
the close of business on the business day following each sale from a
Rollover series to a New Series: (a) that the transaction is consistent
with the investment objective and policies of both the Rollover Series
and the New Series, as recited in their respective registration
statements and reports filed under the Act, (b) the reason that the
Rollover Series is selling the Qualified Securities, (c) the date of
the transaction, (d) how the securities being sold meet the definition
of Qualified Securities set forth in the requested order, and (e) the
closing sale price of the Qualified Securities on the Qualified
Exchange for the date the Qualified Securities are sold to the New
Series (``Sale Date''). The Trustee will then countersign the
certificate, unless, in the event that the Trustee disagrees with the
closing sales price listed on the certificate, the Trustee immediately
informs the Sponsor orally of any such disagreement and returns the
certificate within five days to the Sponsor with corrections duly
noted. Upon the Sponsor's receipt of a corrected certificate, if the
Sponsor can verify the corrected price by reference to an independently
published list of closing sales prices for the date of the transaction,
the Sponsor will ensure that the price of the units of the New Series,
and distributions to holders of the Rollover Series with regard to
redemption of their units or termination of the Rollover Series,
accurately reflect the corrected price. To the extent that the Sponsor
disagrees with the Trustee's corrected price by reference to a mutually
agreeable, independently published list of closing sales prices for the
date of the transaction.
Applicants' Conditions
Applicants agree that the order granting the requested relief will
be subject to the following conditions:
A. Purchases of Stocks of Securities Related Issuers in Excess of Rule
12d3-1 Limits
No company held in a Ten Series portfolio, a Five Series portfolio,
or a Ten/A+Series portfolio, nor any affiliated person of the company,
will act as broker for any Ten Series, any Five Series or any Ten/
A+Series in the purchase or sale of any security for such Series'
portfolio.
B. Purchases and Sales Between Series
1. Each sale of Qualified Securities by a Rollover to a New Series
will be effected at the closing price of the Qualified Securities sold
on a Qualified Exchange on the Sale Date, without any brokerage charges
or other remuneration except customary transfer fees, if any.
2. The nature and conditions of such transactions will be fully
disclosed to investors in the prospectus of each Rollover Series and
New Series.
3. The Trustee of each Rollover Series and New Series will review
the procedures relating to the sale of securities from a Rollover
Series and the purchase of those securities for deposit in a New
Series, and make such changes to the procedures as the Trustee deems
necessary to ensure compliance with paragraphs (s) through (d) of rule
17a-7.
4. A written copy of these procedures and a written record of each
transaction effected pursuant to the order will be maintained as
provided in rule 17a-7(f).
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-2450 Filed 2-3-00; 8:45 am]
BILLING CODE 8010-01-M
