98-10502. NationsBanc Montgomery Securities LLC; Notice of Application  

  • [Federal Register Volume 63, Number 76 (Tuesday, April 21, 1998)]
    [Notices]
    [Pages 19765-19769]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 98-10502]
    
    
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    SECURITIES AND EXCHANGE COMMISSION
    
    [Rel. No. IC-23114; 812-10602]
    
    
    NationsBanc Montgomery Securities LLC; Notice of Application
    
    April 14, 1998.
    AGENCY: Securities and Exchange Commission (``SEC'').
    
    ACTION: Notice of application for an order under section 12(d)(1)(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: NationsBanc Montgomery Securities LLC 
    (``NationsBanc'') requests an order with respect to the Hybrid Income 
    Trust Securities (``HITS'') trusts and future trusts that are 
    substantially similar to the HITS trusts and for which NationsBanc 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 sections 
    3(c)(1) and (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 (iii) permit the Trusts to 
    purchase U.S. government securities from NationsBanc at the time of a 
    Trust's initial issuance of Securities.
    
    FILING DATES: The application was filed on April 4, 1997. Applicant has 
    agreed to file an amendment, the substance of which is incorporated in 
    this notice, 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 
    NationsBanc with a copy of the request, personally or by
    
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    mail. Hearing requests should be received by the SEC by 5:30 p.m. on 
    May 7, 1998, and should be accompanied by proof of service on 
    NationsBanc, 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. 
    NationsBanc, 9 West 57th Street, New York, New York 10019.
    
    FOR FURTHER INFORMATION CONTACT:
    Brian T. Hourihan, Senior Counsel, at (202) 942-0526, 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. (202) 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. NationsBanc 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,\1\ 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 NationsBanc. 
    The investment objective of each Trust will be to provide to each 
    holder of Securities (``Holder'') (i) current 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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        \1\ 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.\2\ 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.\3\
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        \2\ 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.
        \3\ 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 Trust 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 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. NationsBanc 
    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 
    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. The 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 NationsBanc or 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 a default 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 defaults 
    provided for in the Contract, the obligations of the counterparty under 
    the Contract will be accelerated and the available proceeds of the 
    Contract will be distributed to the Security Holders.
        7. The trustees of each Trust will be selected initially by 
    NationsBanc, 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 of 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'' \4\ 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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        \4\ 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 
    Trust 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
    
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    expenses will not be borne by the Holders, but rather, directly or 
    indirectly, by NationsBanc, 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 than the 
    Trust itself (which party may be NationsBanc).
    
    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)(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. NationsBanc believes, in order for the Trusts to be marketed 
    most successfully, and to be traded at a price that most accurately 
    reflects their value, that it is necessary for the Securities of each 
    Trust to be offered to large investment companies and investment 
    company complexes. NationsBanc states that these investors seek to 
    spread the fixed costs of analyzing specific investment opportunities 
    by making sizable investments in those opportunities. Conversely, 
    NationsBanc 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, 
    NationsBanc argues that these investors should be able to acquire 
    Securities in each Trust in excess of the limitations imposed by 
    sections 12(d)(1)(A)(i) and 12(d)(1)(C). NationsBanc requests that the 
    SEC issue an order under section 12(d)(1)(J) exempting the Trusts from 
    the limitations.
        4. NationsBanc 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. NationsBanc 
    also states that section 12(d)(1) was intended to address the layering 
    of costs to investors.
        5. NationsBanc believes 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, NationsBanc 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. NationsBanc also believes 
    that the concern about undue influence through a threat to redeem does 
    not arise 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. NationsBanc believes 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 NationsBanc 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. NationsBanc 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 NationsBanc, 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. NationsBanc believes that the investment product offered by the 
    Trusts serves a valid business purpose. 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, NationsBanc 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 Shares at the time of the issuance of the Securities.
        8. NationsBanc 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. NationsBanc argues that, while the Trusts are classified as 
    management companies, they have the characteristics of unit investments 
    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. NationsBanc 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 an
    
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    ongoing commitment on the part of the underwriter.
        3. NationsBanc 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, NationsBanc 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. NationsBanc 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. NationsBanc requests that the SEC issue an 
    order under section 6(c) exempting the Trusts from the requirements of 
    section 14(a). NationsBanc 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 NationsBanc.
        2. Section 17(b) of the Act provides 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 is consistent 
    with the policies of the registered investment company involved and the 
    purposes of the Act. NationsBanc requests an exemption from sections 
    17(a) (1) and (2) to permit the Trusts to purchase Treasuries from 
    NationsBanc.
        3. NationsBanc 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 for securities. NationsBanc 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. NationsBanc 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. NationsBanc states that it is only 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. NationsBanc 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. 
    NationsBanc 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 in the amount that 
    they would be paid on the Contracts.
        5. NationsBanc 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
    
        NationsBanc 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 NationsBanc, 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 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 
    NationsBanc 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
    
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    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. 98-10502 Filed 4-20-98; 8:45 am]
    BILLING CODE 8010-01-M
    
    
    

Document Information

Published:
04/21/1998
Department:
Securities and Exchange Commission
Entry Type:
Notice
Action:
Notice of application for an order under section 12(d)(1)(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.
Document Number:
98-10502
Dates:
The application was filed on April 4, 1997. Applicant has agreed to file an amendment, the substance of which is incorporated in this notice, during the notice period.
Pages:
19765-19769 (5 pages)
Docket Numbers:
Rel. No. IC-23114, 812-10602
PDF File:
98-10502.pdf