[Federal Register Volume 62, Number 73 (Wednesday, April 16, 1997)]
[Notices]
[Pages 18662-18665]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-9802]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22612; 812-10400]
Smith Barney Inc., et al.; Notice of Application
April 9, 1997.
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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[[Page 18663]]
APPLICANTS: Smith Barney Incorporated (the ``Sponsor''); and Corporate
Securities Trust, Directions Unit Investment Trust, Government
Securities Trust, Harris Upham Tax Exempt Fund, E.F. Hutton Corporate
Income Trust, E.F. Hutton Tax-Exempt Trust, E.F. Hutton Trust for
Government Guaranteed Securities, Hutton Investment Trust, Hutton
Telephone Trust, Hutton Utility Trust, Michigan Fund, Penn State Tax-
Exempt Investment Trust, Pennsylvania Fund, Smith Barney Shearson Unit
Trusts, Tax-Exempt Municipal Trust, Tax Exempt Securities Trust, The
Tax-Exempt Trust, The Uncommon Values Unit Trust, Equity Focus Trust,
Angels With Dirty Faces Trust, The Countryfund Opportunity Trust (each
an ``Existing Trust''); and any other future unit investment trust
sponsored by the Sponsor (collectively, with the Existing Trusts, the
``Trusts'').
RELEVANT ACT SECTIONS: Order requested pursuant to section 6(c) for
exemptions from sections 2(a)(3), 2(a)(35), 22(d) and 26(a)(2) of the
Act and rule 22c-1 thereunder, and pursuant to section 11(a) for an
exemption from section 11(c).
SUMMARY OF APPLICATION: Applicants request an order to modify a
condition to an existing order (the ``Prior Order'') \1\ and to permit
the Trusts 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 series of that Trust.
\1\ Investment Company Act Release Nos. 20296 (May 16, 1994)
(notice) and 20344 (June 8, 1994) (order).
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FILING DATE: The application was filed on October 8, 1996, and amended
on February 26, 1997.
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 on May 5, 1997 and
should be accompanied by proof of service on applicants, in the form of
an affidavit or, for lawyers, a certification 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, NW., Washington, DC 20549.
Applicants, c/o Laurie A. Hesslein, Smith Barney Inc., 388 Greenwich
Street, 23rd Floor, New York, NY 10013.
FOR FURTHER INFORMATION CONTACT:
Kathleen L. Knisely, Staff Attorney, at (202) 942-0517 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 is available for a fee from the
SEC's Public Reference Branch.
Applicants' Representations
1. Each of the Trusts is a unit investment trust registered or to
be registered as an investment company under the Act and is sponsored
or will be sponsored by the Sponsor. Each of the Trusts consists of one
or more series of separate unit investment trusts issuing securities
registered or to be registered under the Securities Act of 1933 (the
``Series''). Applicants request that the relief sought herein apply to
the Trusts and to future series of the 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 is then deposited
with a trustee in exchange for certificates representing fractional
undivided interests 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 market value of the underlying
securities plus an up-front sales charge. The sales charge currently
ranges from 1.50% to 4.70% of the public offering price, generally
depending upon the terms of the underlying securities. The maximum
charge is usually subject to reduction in compliance with rule 22d-1
under the Act under certain stated circumstances disclosed in the
prospectus, such as for a volume discount purchase.
3. Applicants seek exemptive relief to permit payment of the sales
charge for Units of any Series of any of the Trusts to be made on a
deferred basis (the ``deferred sales charge'' or ``DSC''). The Sponsor
will determine the maximum amount of the sales charge per Unit, and
this maximum amount will be stated in the prospectus for the applicable
Series. The Sponsor will have the flexibility to defer the collection
of all or part of the sales charge initially determined as described
above over a period (the ``Collection Period'') subsequent to the
settlement date for the purchase of Units, provided that the Sponsor
will in no event add to the deferred amount of the sales charge
determined as described above any additional amount for interest or any
similar or related charge to reflect or adjust for in any way any
``time-value of money'' calculation related to such deferral.
Applicants also intend to offer certain scheduled variations to the
deferred sales charge such as volume discounts and waivers under
certain circumstances.
4. The Sponsor presently anticipates collecting a portion of the
total sales charge ``up front,'' i.e., immediately upon purchase of
Trust Units. The outstanding balance of the sales charge per Trust Unit
as of the initial date of deposit will be collected over the remaining
collection Period relevant to each particular Trust Series.
5. The amount of the DSC per Unit as of the initial date of deposit
will be stated in the prospectus as a dollar amount and/or as a
percentage. The table required by item 2 of Form N-1A (modified as
appropriate to reflect the difference between unit investment trusts
and open-end management investment companies) and a schedule setting
forth the number and date of each installment payment will be included
in the prospectus. The duration of the Collection Period shall also be
stated in such prospectus.
6. A ratable portion of the sales charge remaining to be collected
will be deducted (``Distribution Deductions'') from income
distributions on the Units, from amounts received on the maturity or
sale of securities or from a combination thereof, or may be paid by the
Series on a periodic basis. Such payment amounts may be advanced by the
trustee, who will be reimbursed from the income account of the Series
(the ``Income Account'') or from the capital or principal account of
the Series (the ``Capital Account'') upon the receipt of the proceeds
from the maturity or sale of securities, until the total amount per
Unit is collected, or deducted from the proceeds of sale, exchange,
redemption or termination. The total of all these amounts will not
exceed the sales charge per Unit. The DSC may be paid out of the Income
or Capital Accounts of the Series and securities may be sold in order
to pay any portion of the DSC due on a certain date in the event that
income is insufficient to pay any amount due on such date.
7. The Sponsor intends to deduct any amount of the unpaid DSC
expense from the proceeds of any redemption of Units
[[Page 18664]]
or of any sale of Units to the Sponsor. In general, if the Sponsor were
to impose a DSC on the redemption or sale of Units, a determination
would be made as to whether a DSC applies to a particular redemption or
sale of Units. For such purposes, it will be assumed that Units owned
by a particular investor on which the total aggregate of Distribution
Deductions have been collected (and therefore for which no DSC is due)
are liquidated first. Any Units disposed of 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 by such investor are redeemed
first.
8. The Sponsor may adopt a procedure of waiving the DSC payable out
of net sales or redemption proceeds under certain circumstances which
will be disclosed in the current prospectus for each Series of Trust
affected. Any such waiver of the DSC will be implemented in accordance
with the provisions of rule 22d-1.
9. Applicants' Prior Order permits the applicants to: (a) make
certain exchange offers between specified funds (the ``Exchange
Privilege''); (b) make certain exchange offers to holders of any
registered unit investment trust carrying a specified sales load (the
``Conversion Privilege''); and (c) publicly offer units of the trusts
without previously privately placing at least $100,000 of units. Under
the Prior Order, applicants may charge a sales charge at the time of
the exchange or conversion not to exceed 1.5% of the unit being
acquired on each exchange. Applicants seek to modify a condition to the
Prior Order to permit exchanges and conversions of Units of Series at a
reduced, as opposed to specified, sales charge (the ``Revised Exchange
and Conversion Privilege'').
10. Applicants also propose to offer a rollover privilege (the
``Rollover Privilege'') which would allow holders the ability to roll
over any or all of their Units in a Series which is terminating (the
``Terminating Trust'') for Units in one or more new Series (the
``Rollover Trust'') at a reduced sales charge. The Revised Exchange and
Conversion Privilege and Rollover Privilege would extend to all
exchanges, conversions, and rollovers of Units sold either with a fixed
sales charge or with a DSC for Units of one or more Series (``Exchange
Trust'' or ``Conversion Trust'') or Rollover Trust sold either with a
fixed sales charge or with a DSC.
11. A holder must notify the Sponsor of this desire to exercise his
Rollover Privilege. Exercise of the Rollover Privilege is subject to
the following conditions: (i) the Sponsor must be maintaining a
secondary market in the Units of the available Rollover Trust, (ii) at
the time of the Holder's election to participate in the Rollover
Privilege, there must also be Units of the Rollover Trust available for
sale, and (iii) exchanges will be effected in whole Units only.
12. Investors who purchase Units under the Revised Exchange and
Conversion Privilege or Rollover Privilege will pay a lower sales
charge than that which would be paid by a new investor. The applicable
reduced sales charge will be applied when an investor exchanges or
converts his Units within five months of his acquisition for Units of a
Series with a lower sales charge. An adjustment would be made, however,
if Units of any Series are exchanged or converted within five months of
acquisition for Units of a Series with a higher sales charge. In such
cases, the exchange or conversion fee will be the greater of (i) the
applicable reduced sales charge or (ii) an amount which, together with
the sales charge already paid on the Units being exchanged or
converted, equals the normal sales charge on the Units of a Trust
Series being acquired through such exchange or conversion. This method
of determining the exchange fee will also be applied in the case where
the exchange of Units is from a Series of a Trust which is terminating
for Units of one or more new Series of such Trust.
Applicant's Legal Analysis
1. Under section 6(c), the Commission may exempt any person or
transaction from any provision of the Act if and to the extent that
such exemption is necessary or appropriate in the pubic 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 any
security, other than short term paper, under the terms of which the
holders upon its presentation to the issuer or a person designated as
the issuer, is entitled to receive approximately his proportionate
share of the issuer's current net assets, or the cash equivalent
thereof. Section 4(2) defines a unit investment trust as an investment
company that issues only redeemable securities. Applicants submit that
the imposition of the DSC would not cause the Units of the Trusts to
fall outside the definition of redeemable securities in section
2(a)(32) of the Act. In order to avoid uncertainty in this regard,
however, applicants request an exemption from section 2(a)(32) to the
extent necessary to permit implementation of the DSC under the proposed
deferred sales charge program.
3. Section 2(a)(35) defines the term ``sales load'' to be the
difference between the sales price and that portion of the proceeds
from its sale which is received and invested or held for investment by
the depositor or trustee. Applicants submit that the DSC is within the
section 2(a)(35) definition of sales load, but for the timing of the
imposition of the charge. Applicants therefore request an exemption
from section 2(a)(35) to the extent necessary to implement the proposed
DSC.
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 security's current net
asset value. Applicants submit that, although the DSC will be deducted
at the time of redemption or repurchase from the holder's proportionate
liquidation proceeds, such deduction does not in any way affect the
calculation of net asset value used to determine the redemption price
for the Units. In order to avoid any possibility that questions might
be raised regarding the applicability of rule 22c-1, applicants request
an exemption from 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 dealers to sell any redeemable security issued by such
investment company only at the current public offering price described
in the investment company's prospectus. Sales loads were historically
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 registered investment companies and principal underwriters and
dealers thereof to sell any redeemable securities issued by such
company with scheduled variations in its sales load, subject to certain
conditions. In the interest of clarity, applicants request that 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) 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
[[Page 18665]]
raised as to the propriety of the trustee disbursing these charges to
the Sponsor, applicants request an exemption from section 26(a)(2) to
the extent necessary to permit the trustee to collect these deductions
and disburse them to the Sponsor as contemplated by the deferred sales
charge program.
7. Section 11(c) prohibits any type of offers of exchange of the
securities of a registered unit investment trusts for securities of any
other investment company unless the terms of the offer have been
approved by the SEC. Applicants assert 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
maintain that the reduction in the sales charge paid for units of the
Series exchanged into is consistent with the provisions of the Act
whether the sales charge on the units exchanged into is collected up-
front and/or on a deferred basis.
8. Applicants represent that holders will not be induced or
encouraged to participate in the Revised Exchange and Conversion
Privilege 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 salesmen to promote inappropriately the Revised
Exchange and Conversion Privilege 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. Applicants agree that whenever the Revised Exchange and
Conversion Privilege or Rollover Privilege 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 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 Revised
Exchange and Conversion Privilege or the 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, Conversion or Rollover Trust
under section 22(e) of the Act and the rules and regulations
promulgated thereunder, or (ii) an Exchange, Conversion 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 Revised Exchange and
Conversion 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. Applicants agree that the prospectus of each Series and any
sales literature or advertising that mentions the existence of the
Revised Exchange and Conversion Privilege or the Rollover Privilege
will disclose that they 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.
5. Applicants agree to continue to comply with all of the
conditions contained in the Prior Order, except that condition 2 of the
Prior Order is amended by condition 2 above.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-9802 Filed 4-15-97; 8:45 am]
BILLING CODE 8010-01-M
