[Federal Register Volume 60, Number 43 (Monday, March 6, 1995)]
[Notices]
[Pages 12266-12268]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-5336]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20922; 812-8846]
Prudential Securities Incorporated, et al.; Notice of Application
February 27, 1995.
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: Prudential Securities Incorporated (the ``Sponsor''); and
National Municipal Trust, Prudential Unit Trusts, National Equity
Trust, and Government Securities Equity Trust (the ``Trusts'').
RELEVANT ACT SECTIONS: Order requested pursuant to section 6(c) for
exemptions from sections 2(a)(32), 2(a)(35), 22(c), 22(d), and
26(a)(2)(C) of the Act and rule 22c-1 thereunder, and pursuant to
section 11(a) to amend a prior order (the ``Prior Order'') granting
relief from section 11(c).\1\
\1\Prudential-Bache Securities, Inc., Investment Company Act
Release Nos. 14943 (Feb. 18, 1986) (notice) and 14989 (March 13,
1986) (order).
Summary of Application: Applicants seek to impose sales charges on a
deferred basis and waive the deferred sales charge in certain cases,
exchange Trust units having deferred sales charges, and exchange units
of a terminating series of a Trust for units of the next available
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series of that Trust.
FILING DATES: The application was filed on February 22, 1994 and
amended on July 21, 1994, January 19, 1995, and February 21, 1995.
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 March 24, 1995,
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 the date of a hearing may request
[[Page 12267]] notification by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street NW., Washington, D.C.
20549. Applicants, 32 Old Slip, New York, New York 10292.
FOR FURTHER INFORMATION CONTACT: Fran Pollack-Matz, Senior Attorney, at
(202 942-0570 or C. David Messman, 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 is available for a fee from the
SEC's Public Reference Branch.
Applicant's Representations
1. Each of the Trusts is a unit investment trust sponsored by the
Sponsor. The Trusts are made up of one or more separate series
(``Series''). Over four hundred Series of the Trusts are currently
outstanding.
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 and deposits them with a
trustee in exchange for certificates representing fractional undivided
interests in the portfolio of securities (``Units''). Units currently
are offered to the public through the Sponsor and other underwriters
and dealers at a price based upon the aggregate offering side
evaluation of the underlying securities plus an up-front sales charge.
The sales charge currently ranges from 2.00% to 5.50% of the public
offering price. The Sponsor may offer a discounted sales charge to
unitholders within a Series based on the quantity of Units purchased.
The sales charge may also vary among Series depending on the terms of
the underlying securities.
3. Applicants seek an order under section 6(c) exempting them from
sections 2(a)(32), 2(a)(35), 22(c), 22(d), and 26(a)(2)(C) and rule
22c-1 thereunder to let them impose sales charges on Units on a
deferred basis and waive the deferred sales charge in certain cases.
Under applicants' proposal, the Sponsor will continue to determine the
amount of sales charge per Unit at the time portfolio securities are
deposited in a Series. The Sponsor will have the discretion to defer
collection of all or part of this sales charge over a period
(``Collection Period'') following the settlement date for the purchase
of Units. The Sponsor will in no event add to the deferred amount
initially determined any additional amount for interest or any similar
or related charge to reflect or adjust for such deferral.
4. The deferred sales charge (``DSC'') may be (a) deducted from the
proceeds of a sale, exchange, or redemption of units or termination of
the Series; or (b) deducted from (i) amounts received on the sale of
portfolio securities, (ii) amounts received on the maturity of
portfolio securities, (iii) income distributions on the Units, or (iv)
a combination thereof (``Distribution Deductions''). Alternatively, the
trustee may advance the DSC on behalf of the Series on a periodic
basis, in which case the trustee will be reimbursed from the income or
principal account of the Series upon the receipt of proceeds from the
maturity or sale of portfolio securities, until the total amount per
unit is collected. The total of all these amounts will not exceed the
aggregate DSC per unit.
5. For purposes of calculating the amount of the deferred sales
charge due upon redemption or sale of Units, it will be assumed that
Units on which the balance of the sales charge has been collected from
installment payments are liquidated first. Any Units disposed of over
such amounts will be redeemed in the order of their purchase, so that
Units held for the longest time are redeemed first.
6. The Sponsor may adopt a procedure of waiving the DSC payable out
of net sales, exchange, or redemption proceeds, if necessary, so as not
to jeopardize the tax-exempt nature of various investors such as
Individual Retirement Accounts and employee benefits plans, if
otherwise required for tax purposes, or for such other reasons as
disclosed in the prospectus.
7. The date and amount of each DSC accrual or payment will be
disclosed in the prospectus. The prospectus for a Series will disclose
that portfolio securities may be sold to pay the DSC if amounts in the
income account are insufficient to pay the DSC or proceeds from
portfolio securities are intended to pay the DSC. The confirmation
received by a holder on the purchase, sale, exchange, or redemption of
a Unit will indicate the DSC to the extent required by National
Association of Securities Dealers, Inc. rules. The account statement of
a holder will reflect a value for a Unit. The account statement,
however, will not reflect the amount a holder paid for the up-front
sales charge. At the end of every year, the Series' annual report will
reflect the aggregate amount of any Distribution Deductions taken, both
on a Series and per Unit basis.
8. Units received in an exchange are subject to a fixed dollar
sales charge of $15, $20, or $25 per $1000 of Units for (a) Units
trading in the secondary market, (b) Units trading in the secondary
market received upon the exchange of units of a trust not solely
sponsored by the Sponsor, and (c) Units received during such Series'
initial offering period, respectively. When Units held for less than
five months are exchanged for Units with a higher regular sales charge,
the sales charge will be the greater of (a) the reduced sales charge or
(b) the difference between the sales charge paid in acquiring the Units
being exchanged and the regular sales charge for the quantity of Units
being acquired, determined as of the date of the exchange.
9. Applicants seek to amend the Prior Order to permit offers of
exchange of Units subject to a DSC. If a Unit subject to a DSC is being
exchanged, the proceeds due to the exchanging investor will be net of
the DSC due upon the sale of a Unit at such time. Units acquired in the
exchange will be subject to the greater of a sales load of a fixed
dollar amount (currently ranging from $15 to $25 depending on whether
the Series being acquired is in the initial offering period or the
secondary market) or the amount of the DSC remaining on the Units being
acquired.
10. The Sponsor may offer certain Series that have intermediate or
short-term stated maturities. Upon termination of such Series, the
Sponsor may create a new Series with the same investment objective, the
same type of portfolio securities as the terminating Series, and in
certain instances some of the same portfolio securities. Applicants
wish to make Units of the new Series available to the unitholders of
the terminating Series at the net asset value of the new Units plus a
reduced sales charge on an up-front and/or deferred basis (the
``Rollover Option''). Although applicants believe that the Prior Order
already permits the Rollover Option, they request that the Prior Order
be amended to cover the Rollover Option explicitly.
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 with the protection of investors and the purposes fairly
intended by the policy and provisions of the Act.
2. Section 2(a)(32) defines a ``redeemable security'' as a security
that, upon its presentation to the issuer, entitles the holder to
receive [[Page 12268]] approximately his or her proportionate share of
the issuer's current net assets, or the cash equivalent of those
assets.\2\
\2\Without an exemption, a trust selling unit subject to a
deferred sales charge could not meet the definition of a unit
investment trust under section 4(2) of the Act. Section 4(2) defines
a unit investment trust as an investment company that issues only
``redeemable securities.''
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3. Section 2(a)(35) defines the term ``sales load'' to be the
difference between the sales price and the proceeds to the issuer, less
any expenses not properly chargeable to sales or promotional expenses.
Because a DSC is not charged at the time of purchase, an exemption from
section 2(a)(35) is necessary.
4. Section 22(c) and rule 22c-1 require that the price of a
redeemable security issued by an investment company for purposes of
sale, redemption, and repurchase be based on the investment company's
current net asset value. Because the imposition of a DSC may cause a
redeeming unit holder to receive an amount less than the net asset
value of the redeemed Units, applicants seek an exemption from this
section and rule.
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.
Because sales charges traditionally have been a component of the public
offering price, section 22(d) historically required that all investors
be charged the same load. Rule 22d-1 was adopted to permit the sale of
redeemable securities ``at prices that reflect scheduled variations in,
or elimination of, the sales load.'' Because rule 22d-1 may not be
interpreted as extending to scheduled variations in deferred sales
charges, applicants seek relief from section 22(d) to permit each
Series to waive or reduce the DSC in certain circumstances. Any waiver
or reduction will comply with the conditions in paragraphs (a) through
(d) of rule 22d-1 under the Act.
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.
Because of this prohibition, applicants need an exemption to permit the
trustee to collect the DSC installments from distribution deductions or
Trust assets.
7. Applicants believe that implementation of the DSC program in the
manner described above would be fair and in the best interests of the
unitholders of the Trusts. Thus, granting the requested order would be
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.
8. 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. Applicants assert that the reduced sales charge imposed at the
time of exchange is a reasonable and justifiable expense to be
allocated for the professional assistance and operational expenses
incurred in connection with the exchange.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. Whenever the exchange option is to be terminated or its terms
are to be amended materially, any holder 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 option, 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 the Trust under section 22(e) and the rules and
regulations promulgated thereunder, or (ii) a 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. The amount of the sales charge per Unit collected from a holder
at the time of any exchange or conversion of a Unit will be lower than
the sales charge collected on the initial purchase of the same Unit at
such time.
3. The prospectus of each Trust offering exchanges and any sales
literature or advertising that mentions the existence of the exchange
option will disclose that the exchange option is subject to
modification, termination, or suspension, without notice except in
certain limited cases.
4. Each Series offering Units subject to a deferred sales charge
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. 95-5336 Filed 3-3-95; 8:45 am]
BILLING CODE 8010-01-M
