[Federal Register Volume 64, Number 42 (Thursday, March 4, 1999)]
[Notices]
[Pages 10507-10510]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-5294]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 23718; 812-11478]
Warburg Dillon Read LLC; Notice of Application
February 25, 1999.
agency: Securities and Exchange Commission (``Commission'' ''or SEC'').
action: Notice of application for an order under section 12(d)(J) of
the Investment Company Act of 1940 (the ``Act'') for an exemption from
section 12(d)(1) of the Act, under section 6(c) of the Act for an
exemption from section 14(a) of the Act, and under section 17(b) of the
Act for an exemption from section 17(a) of the Act.
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summary of application: Warburg Dillon Read LLC (``Warburg'') requests
an order with respect to the T-REX securities trusts (``T-REX Trusts'')
\1\ and future trusts that are substantially similar to T-REX Trusts
for which Warburg will serve as a principal underwriter (collectively,
the ``Trusts'') that would (i) permit other registered investment
companies, and companies excepted from the definition of investment
company under section 3(c)(1) or (c)(7) of the Act, to own a greater
percentage of the total outstanding voting stock (the ``Securities'')
of any Trust than that permitted by section 12(d)(1), (ii) exempt the
Trusts from the initial net worth requirements of section 14(a), and
(ii) permit the Trusts to purchase U.S. government securities from
Warburg at the time of a Trust's initial issuance of Securities.
\1\ ``T-REX'' is a acronym for Trust-Issued Required Equity
Exchange Securities.
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filing date: The application was filed on January 22, 1999.
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 Warburg
with a copy of the request, personally or by mail. Hearing requests
should be received by the SEC by 5:30 p.m. on March 22, 1999, and
should be accompanied by proof of service on Warburg, in the form of an
affidavit, or, for lawyers, a certificate of service. Hearing requests
should state the nature of the writer's interest, the reason for the
request, and the issues contested. Persons may request notification of
a hearing by writing to the SEC's Secretary.
addresses: Secretary, SEC, 450 Fifth Street, NW, Washington, DC 20549.
Applicant, 299 Park Avenue, New York, New York 10171.
for further information contact: Bruce R. MacNeil, Staff Attorney, at
(202) 942-0634, or Mary Kay Frech, Branch Chief, at (202) 942-0564
(Division of Investment Management, Office of Investment Company
Regulation).
supplementary information: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch, 450 Fifth Street, NW, Washington, DC
20549 (tel. 942-8090).
Applicant's Representations
1. Each Trust will be a limited-life, grantor trust registered
under the Act as a non-diversified, closed-end management investment
company. Warburg will serve as a principal underwriter (as defined in
section 2(a)(29) of the Act) of the Securities issued to the public by
each Trust.
2. Each Trust will, at the time of its issuance of Securities, (i)
enter into one or more forward purchase contracts (the ``Contracts'')
with a counterparty to purchase a formulaically-determined number of a
specified equity security or securities (the ``Shares'') of one
specified issuer,\2\ and (ii) in some cases, purchase certain U.S.
Treasury securities (``Treasuries''), which may include interest-only
or principal-only securities maturing at or prior to the Trust's
termination. The Trusts will purchase the Contracts from counterparties
that are not affiliated with either the relevant Trust or Warburg. The
investment objective of each Trust will be to provide to each holder of
Securities (``Holder'') (i) periodic cash distributions from the
proceeds of any Treasuries, and (ii) participation in, or limited
exposure to, changes in the market value of the underlying Shares.
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\2\ Initially, no Trust will hold Contracts relating to the
Shares of more than one issuer. However, if certain events specified
in the Contracts occur, such as the issuer of Shares spinning-off
securities of another issuer to the holders of the Shares, the Trust
may receive shares of more than one issuer at the termination of the
Contracts.
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3. In all cases, the Shares will trade in the secondary market and
the issuer of the Shares will be a reporting company under the
Securities Exchange Act of 1934. The number of Shares, or the value of
the Shares, that will be delivered to a Trust pursuant to the Contracts
may be fixed (e.g., one Share per Security issued) or may be determined
pursuant to a formula, the product of which will vary with the price of
the Shares. A formula generally will result in each Holder of
Securities receiving fewer Shares as the market value of the Shares
increases, and more Shares as their market value decreases.\3\ At the
termination of each Trust, each Holder will receive the number of
Shares per Security, or the value of the Shares, as determined by the
terms of the Contracts, that is equal to the Holder's pro rata interest
in the Shares or amount received by the Trust under the Contracts.\4\
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\3\ A formula is likely to limit the Holder's participation in
any appreciation of the underlying Shares, and it may, in some
cases, limit the Holder's exposure to any depreciation in the
underlying Shares. It is anticipated that the Holders will receive a
yield greater than the ordinary dividend yield on the Shares at the
time of the issuance of the Securities, which is intended to
compensate Holders for the limit on the Holders' participation in
any appreciation of the underlying Shares. In some cases, there may
be an upper limit on the value of the Shares that a Holder will
ultimately receive.
\4\ The Contracts may provide for an option on the part of a
counterparty to deliver Shares, cash, or a combination of Shares and
cash to the Trust at the termination of each Trust.
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4. Securities issued by the Trusts will be listed on a national
securities exchange or traded on the Nasdaq National Market System.
Thus, the Securities will be ``national market system'' securities
subject to public
[[Page 10508]]
price quotation and trade reporting requirements. After the Securities
are issued, the trading price of the Securities is expected to vary
from time to time based primarily upon the price of the underlying
Shares, interest rates, and other factors affecting conditions and
prices in the debt and equity markets. Warburg currently intends, but
will not be obligated, to make a market in the Securities of each
Trust.
5. Each Trust will be internally managed by three trustees and will
not have a separate investment adviser. The trustees will have limited
or no power to vary the investments held by each Trust. A bank or banks
qualified to serve as a trustee under the Trust Indenture Act of 1939,
as amended, will act as custodian for each Trust's assets and as
administrator, paying agent, registrar, and transfer agent with respect
to the Securities of each Trust. Any such bank will have no other
affiliation with, and will not be engaged in any other transaction
with, any Trust. The day-to-day administration of each Trust will be
carried out by Warburg or by the bank.
6. The Trusts will be structured so that the trustees are not
authorized to sell the Contracts or Treasuries under any circumstances
or only upon the occurrence of certain events under a Contract. The
Trusts will hold the Contracts until maturity or any earlier
acceleration, at which time they will be settled according to their
terms. However, in the event of the bankruptcy or insolvency of any
counterparty to a Contract with a Trust, or the occurrence of certain
other events provided for the Contract, the obligations of the
counterparty under the Contract may be accelerated and the available
proceeds of the Contract will be distributed to the Holders.
7. The trustees of each Trust will be selected initially by
Warburg, together with any other initial Holders, or by the grantors of
the Trust. The Holders of each Trust will have the right, upon the
declaration in writing or vote or more than two-thirds of the
outstanding Securities of the Trust, to remove a trustee. Holders will
be entitled to a full vote for each Security held on all matters to be
voted on by Holders and will not be able to cumulate their votes in the
election of trustees. The investment objectives and policies of each
Trust may be changed only with the approval of a ``majority of the
Trust's outstanding Securities'' \5\ or any greater number required by
the Trust's constituent documents. Unless Holders so request, it is not
expected that the Trusts will hold any meetings of Holders, or that
Holders will ever vote.
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\5\ A ``majority of the Trust's outstanding Securities'' means
the lesser of (i) 67% of the Securities represented at a meeting at
which more than 50% of the outstanding Securities are represented,
and (ii) more than 50% of the outstanding Securities.
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8. The Trusts will not be entitled to any rights with respect to
the Shares until any Contracts requiring delivery of the Shares to the
Trusts are settled, at which time the Shares will be promptly
distributed to Holders. The Holders, therefore, will not be entitled to
any rights with respect to the Shares (including voting rights or the
right to receive any dividends or other distributions) until receipt by
them of the Shares at the time the Trust is liquidated.
9. Each Trust will be structured so that its organizational and
ongoing expenses will not be borne by the Holders, but rather, directly
or indirectly, by Warburg, the counterparties, or another third party,
as will be described in the prospectus for the relevant Trust. At the
time of the original issuance of the Securities of any Trust, there
will be paid to each of the administrator, the custodian, and the
paying agent, and to each trustee, a one-time amount in respect of such
agent's fee over its term. Any expenses of the Trust in excess of this
anticipated amount will be paid as incurred by a party other then the
Trust itself (which party may be Warburg).
Applicant's Legal Analysis
A. Section 12(d)(1)
1. Section 12(d)(1)(A)(i) of the Act prohibits (i) any registered
investment company from owning in the aggregate more than 3% of the
total outstanding voting stock of any other investment company, and
(ii) any investment company from owning in the aggregate more than 3%
of the total outstanding voting stock of any registered investment
company. A company that is excepted from the definition of investment
company under section 3(c)(1) or (c)(7) of the Act is deemed to be an
investment company for purposes of section 12(d)(1)(A)(i) of the Act
under sections 3(c)(1) and (c)(7)(D) of the Act. Section 12(d)(1)(C) of
the Act similarly prohibits any investment company, other investment
companies having the same investment adviser, and companies controlled
by such investment companies from owning more than 10% of the total
outstanding voting stock of any closed-end investment company.
2. Section 12(d)(1)(J) of the Act provides that the SEC may exempt
persons or transactions from any provision of section 12(d)(1), if, and
to the extent that, the exemption is consistent with the public
interest and protection of investors.
3. Warburg states that, in order for the Trusts to be marketed most
successfully, and to be traded at a price that most accurately reflects
their value, it is necessary for the Securities of each Trust to be
offered to large investment companies and investment company complexes.
Warburg states that these investors seek to spread the fixed costs of
analyzing specific investment opportunities by making sizable
investments in those opportunities. Conversely, Warburg asserts that it
may not be economically rational for the investors, or their advisers,
to take the time to review an investment opportunity if the amount that
the investors would ultimately be permitted to purchase is immaterial
in light of the total assets of the investment company or investment
company complex. Therefore, Warburg argues that these investors should
be able to acquire Securities in each Trust in excess of the
limitations imposed by section 12(d)(1)(A)(i) and 12(d)(1)(C). Warburg
requests that the SEC issue an order under section 12(d)(1)(J)
exempting the Trusts from the limitations.
4. Warburg states that section 12(d)(1) was designed to prevent one
investment company from buying control of other investment companies
and creating complicated pyramidal structures. Warburg also states that
section 12(d)(1) was intended to address the layering of costs to
investors.
5. Warburg asserts that the concerns about pyramiding and undue
influence generally do not arise in the case of the Trusts because
neither the trustees nor the Holders will have the power to vary the
investments held by each Trust or to acquire or dispose of the assets
of the Trusts. To the extent that Holders can change the composition of
the board of trustees or the fundamental policies of each Trust by
vote, Warburg argues that any concerns regarding undue influence will
be eliminated by a provision in the charter documents of the Trusts
that will require any investment companies owning voting stock of any
Trust in excess of the limits imposed by sections 12(d)(1)(A)(i) and
12(d)(1)(C) to vote their Securities in proportion to the votes of all
other Holders. Warburg also states that the concern about undue
influence through a threat to redeem does not case in the case of the
Trusts because the Securities will not be redeemable.
6. Section 12(d)(1) also was designed to address the excessive
costs and fees that may result from multiple layers of investment
companies. Warburg states
[[Page 10509]]
that these concerns do not arise in the case of the Trusts because of
the limited ongoing fees and expenses incurred by the Trusts and
because generally these fees and expenses will be borne, directly or
indirectly, by Warburg or another third party, not by the Holders. In
addition, the Holders will not, as a practical matter, bear the
organizational expenses (including underwriting expenses) of the
Trusts. Warburg asserts that the organizational expenses effectively
will be borne by the counterparties in the form of a discount in the
price paid to them for the Contracts, or will be borne directly by
Warburg, the counterparties, or other third parties. Thus, a Holder
will not pay duplicative charges to purchase securities in any Trust.
Finally, there will be no duplication of advisory fees because the
Trusts will be internally managed by their trustees.
7. Warburg asserts that the investment product offered by the
Trusts serves a valid business people. The Trusts, unlike most
registered investment companies, are not marketed to provide investors
with either professional investment asset management or the benefits of
investment in a diversified pool of assets. Rather, Warburg asserts
that the Securities are intended to provide Holders with an investment
having unique payment and risk characteristics, including an
anticipated higher current yield than the ordinary dividend yield on
the States at the time of the issuance of the Securities.
8. Warburg believes that the purposes and policies of section
12(d)(1) are not implicated by the Trusts and that the requested
exemption from section 12(d)(1) is consistent with the public interest
and the protection of investors.
B. Section 14(a)
1. Section 14(a) of the Act requires, in pertinent part, that an
investment company have a net worth of at least $100,000 before making
any public offering of its shares. The purpose of section 14(a) is to
ensure that investment companies are adequately capitalized prior to or
simultaneously with the sale of their securities to the public. Rule
14a-3 exempts from section 14(a) unit investment trusts that meet
certain conditions in recognition of the fact that, once the units are
sold, a unit investment trust requires much less commitment on the part
of the sponsor than does a management investment company. Rule 14a-3
provides that a unit investment trust investing in eligible trust
securities shall be exempt from the net worth requirement, provided
that the trust holds at least $100,000 of eligible trust securities at
the commencement of a public offering.
2. Warburg argues that, while the Trusts are classified as
management companies, they have the characteristics of unit investment
trusts. Investors in the Trusts, like investors in a unit investment
trust, will not be purchasing interests in a managed pool of
securities, but rather in a fixed and disclosed portfolio that is held
until maturity. Warburg believes that the make-up of each Trust's
assets, therefore, will be ``locked-in'' for the life of the portfolio,
and there is no need for ongoing commitment on the part of the
underwriter.
3. Warburg states that, in order to ensure that each Trust will
become a going concern, the Securities of each Trust will be publicly
offered in a firm commitment underwriting, registered under the
Securities Act of 1933, resulting in net proceeds to each Trust of at
least $10,000,000. Prior to the issuance and delivery of the Securities
of each Trust to the underwriters, the underwriters will enter into an
underwriting agreement pursuant to which they will agree to purchase
the Securities subject to customary conditions to closing. The
underwriters will not be entitled to purchase less than all of the
Securities of each Trust. Accordingly, Warburg states that either the
offering will not be completed at all or each Trust will have a net
worth substantially in excess of $100,000 on the date of the issuance
of the Securities. Warburg also does not anticipate that the net worth
of the Trusts will fall below $100,000 before they are terminated.
4. Section 6(c) of the Act provides that the SEC may exempt persons
or transactions if, and to the extent that, the exemption is necessary
or appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the policy
and provisions of the Act. Warburg requests that the SEC issue an order
under section 6(c) exempting the Trusts from the requirements of
section 14(a). Warburg believes that the exemption is appropriate in
the public interest and consistent with the protection of investors and
the policies and provisions of the Act.
C. Section 17(a)
1. Sections 17(a)(1) and (2) of the Act generally prohibit the
principal underwriter, or any affiliated person of the principal
underwriter, of a registered investment company from selling or
purchasing any securities to or from that investment company. The
result of these provisions is to preclude the Trusts from purchasing
Treasuries from Warburg.
2. Section 17(b) of the Act provides that the SEC shall exempt a
proposed transaction from section 17(a) if evidence establishes that
the terms of the proposed transaction are reasonable and fair and do
not involve overreaching, and the proposed transaction are reasonable
and fair and do not involve overreaching, and the proposed transaction
is consistent with the policies of the registered investment company
involved and the purposes of the Act. Warburg requests an exemption
from sections 17(a)(1) and (2) to permit the Trusts to purchase
Treasuries from Warburg.
3. Warburg states that the policy rationale underlying section
17(a) is the concern that an affiliated person of an investment
company, by virtue of this relationship, could cause the investment
company to purchase securities of poor quality from the affiliated
person or to overpay from securities. Warburg argues that it is
unlikely that it would be able to exercise any adverse influence over
the Trusts with respect to purchases of Treasuries because Treasuries
do not vary in quality and are traded in one of the most liquid markets
in the world. Treasuries are available through both primary and
secondary dealers, making the Treasury market very competitive. In
addition, market prices on Treasuries can be confirmed on a number of
commercially available information screens. Warburg argues that because
it is one of a limited number of primary dealers in Treasuries, it will
be able to offer the Trusts prompt execution of their Treasury
purchases at very competitive prices.
4. Warburg states that it only is seeking relief from section 17(a)
with respect to the initial purchase of the Treasuries and not with
respect to an ongoing course of business. Consequently, investors will
know before they purchase a Trust's Securities the Treasuries that will
be owned by the Trust and the amount of the cash payments that will be
provided periodically by the Treasuries to the Trust and distributed to
Holders. Warburg also asserts that whatever risk there is of
overpricing the Treasuries will be borne by the counterparties and not
by the Holders because the cost of the Treasuries will be calculated
into the amount paid on the Contracts. Warburg argues that, for this
reason, the counterparties will have a strong incentive to monitor the
price paid for the Treasuries, because any overpayment could result in
a reduction
[[Page 10510]]
in the amount that they would be paid on the Contracts.
5. Warburg believes that the terms of the proposed transaction are
reasonable and fair and do not involve overreaching on the part of any
person, that the proposed transaction is consistent with the policy of
each of the Trusts, and that the requested exemption is appropriate in
the public interest and consistent with the protection of investors and
purposes fairly intended by the policies and provisions of the Act.
Applicant's Conditions
Warburg agrees that the order granting the requested relief will be
subject to the following conditions:
1. Any investment company owning voting stock of any Trust in
excess of the limits imposed by section 12(d)(1) of the Act will be
required by the Trust's charter documents, or will undertake, to vote
its Trust shares in proportion to the vote of all other Holders.
2. The trustees of each Trust, including a majority of the trustees
who are not interested persons of the Trust, (i) will adopt procedures
that are reasonably designed to provide that the conditions set forth
below have been complied with; (ii) will make and approve such changes
as are deemed necessary; and (iii) will determine that the transactions
made pursuant to the order were effected in compliance with such
procedures.
3. The Trusts (i) will maintain and preserve in an easily
accessible place a written copy of the procedures (and any
modifications to the procedures), and (ii) will maintain and preserve
for the longer of (a) the life of the Trusts and (b) six years
following the purchase of any Treasuries, the first two years in an
easily accessible place, a written record of all Treasuries purchased,
whether or not from Warburg, setting forth a description of the
Treasuries purchased, the identity of the seller, the terms of the
purchase, and the information or materials upon which the
determinations described below were made.
4. The Treasuries to be purchased by each Trust will be sufficient
to provide payments to Holders of Securities that are consistent with
the investment objectives and policies of the Trust as recited in the
Trust's registration statement and will be consistent with the
interests of the Trust and the Holders of its Securities.
5. The terms of the transactions will be reasonable and fair to the
Holders of the Securities issued by each Trust and will not involve
overreaching of the Trust or the Holders of Securities of the Trust on
the part of any person concerned.
6. The fee, spread, or other remuneration to be received by Warburg
will be reasonable and fair compared to the fee, spread, or other
remuneration received by dealers in connection with comparable
transactions at such time, and will comply with section 17(e)(2)(C) of
the Act.
7. Before any Treasuries are purchased by the Trust, the Trust must
obtain such available market information as it deems necessary to
determine that the price to be paid for, and the terms of, the
transaction are at least as favorable as that available from other
sources. This will include the Trust obtaining and documenting the
competitive indications with respect to the specific proposed
transaction from two other independent government securities dealers.
Competitive quotation information must include price and settlement
terms. These dealers must be those who, in the experience of the
Trust's trustees, have demonstrated the consistent ability to provide
professional execution of Treasury transactions at competitive market
prices. They also must be those who are in a position to quote
favorable prices.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-5294 Filed 3-3-99; 8:45 am]
BILLING CODE 8010-01-M
