[Federal Register Volume 59, Number 97 (Friday, May 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12391]
[[Page Unknown]]
[Federal Register: May 20, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20296; 812-8932]
Smith Barney Shearson Unit Trusts and Smith Barney Shearson Inc.;
Notice of Application
May 16, 1994.
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: Smith Barney Shearson Inc. (``Smith Barney Shearson'' or
the ``Sponsor''); Directors Unit Investment Trust, 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, Pennsylvania Fund, Smith Barney Shearson Unit Trusts,
Tax-Exempt Municipal Trust, the Tax-Exempt Trust, and the Uncommon
Values Unit Trust (the ``Shearson Funds''); and Corporate Securities
Trust, Government Securities Trust, Harris Upham Tax Exempt Fund, and
Tax Exempt Securities Trust (the ``Smith Barney Funds'').
RELEVANT ACT SECTIONS: Exemption requested under section 6(c) from
section 14(a) and pursuant to section 11(a).
SUMMARY OF APPLICATION: Applicants request an order to amend a previous
order (the ``Shearson Order'') that let the Shearson and Smith Barney
Funds (a) make certain exchange offers between the Shearson and Smith
Barney Funds (the ``Exchange Option''); (b) make certain exchange
offers to holders of any registered unit investment trust carrying a
specified sales load (the ``Conversion Option''); and (c) publicly
offer units of the trusts without previously privately placing at least
$100,000 of units. The present order is necessary because of the sale
of the assets of Shearson Lehman Brothers (``Shearson'') to Primerica
Corporation and Primerica's subsidiary, Smith Barney Shearson, formerly
Smith Barney Upham & Co. Inc. (``Smith Barney'').
FILING DATE: The application was filed on April 11, 1994. Applicants
have agreed to file an additional amendment, the substance of which is
incorporated herein, 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
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 June 7, 1994,
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 may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street NW., Washington, DC 20549.
Applicants, Two World Trade Center, 104th Floor, New York, NY 10048.
FOR FURTHER INFORMATION CONTACT:
Elaine M. Boggs, Staff Attorney, at (202) 942-0572, or Robert A.
Robertson, 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 at the
SEC's Public Reference Branch.
Applicant's Representations
1. Each of the Shearson and Smith Barney Funds is registered under
the Act as a unit investment trust and consists of one or more separate
series. Each series holds a separate portfolio of securities and has a
separate registration statement under the Securities Act of 1933 (the
``1933 Act''). The Sponsor is a registered broker-dealer and investment
adviser.
2. On March 12, 1993, Shearson entered into an asset purchase
agreement with Primerica and its indirect wholly-owned subsidiary Smith
Barney. The agreement provided for the sale to Smith Barney and its
designated affiliates of substantially all the assets of Shearson (the
``Transaction''). Upon the closing of the Transaction on July 31, 1993,
Smith Barney changed its name to Smith Barney Shearson Inc. and became
the sponsor and principal underwriter of the Shearson Funds, which were
formerly sponsored and underwritten by Shearson. Subsequently,
Primerica was acquired by the Travelers, Inc.
3. The Shearson Order let the Shearson Funds and their sponsor (a)
make certain exchange offers between the Shearson Funds; (b) make
certain exchange offers to holders of any registered unit investment
trust carrying a specified sales load; and (c) publicly offer units of
the unit trusts without previously privately placing at least $100,000
of units.\1\ At the request of Shearson and Smith Barney, the SEC's
Division of Investment Management informed Shearson and Smith Barney
that the Division would not recommend that the SEC take any enforcement
action against them if registered investment companies sponsored by
Shearson operate under the terms of any prior order until the earlier
of (a) the date any prior order is renewed by the SEC pursuant to a
renewal order specifying Smith Barney and its subsidiaries or
affiliates as applicants or (b) June 8, 1994.\2\ Applicants request an
order to continue and renew the exemptions granted in the Shearson
Order and request that the relief be extended to Smith Barney Shearson
and any of its subsidiaries or affiliates, or any future series of
funds as to which Smith Barney Shearson or any of its subsidiaries or
affiliates may act as Sponsor or principal underwriter in the same
manner and to the same extent as the relief in the Shearson Order
applied to the former sponsor of the Shearson Funds (collectively with
the Shearson Funds and the Smith Barney Funds, the ``Funds'').
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\1\Investment Company Act Release Nos. 18145 (May 14, 1991)
(notice) and 18191 (June 11, 1991) (order).
\2\Shearson Lehman Brothers Inc. (pub. avail. June 8, 1993).
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A. The Exchange and Conversion Options
1. To create a series of a Fund, the Sponsor usually acquires a
portfolio of securities believed to satisfy the investment objective of
the particular series, and then deposits the securities with a bank
(the ``Trustee'') in exchange for units of fractional undivided
interest in the deposited portfolio. The Sponsor offers units to the
public at a price that is initially based on the offering prices of the
underlying securities plus a sales charge. In the secondary market, the
price of a unit is generally based on the bid prices of the underlying
securities or, for listed common or preferred stock, the closing sales
price, plus a sales charge.
2. The sales charge in the primary market is currently as high as
4.5% of the public offering price. The sales charge is reduced on large
purchases. The secondary sales charge on the series is typically 1%
higher at each level and has ranged between 5.50% and 3.0% of the
public offering price with reductions based on the number of units
purchased.
3. The Sponsor maintains a secondary market for units of
outstanding series and continually offers those units at prices
normally based on the bid side evaluation of the underlying securities
in the particular series. If the Sponsor discontinues maintaining this
market, units of the series can be liquidated by their holders
(``Holders'') by direct presentation to the Trustee at redemption
prices also based on the bid side evaluation of the underlying
securities. The evaluations are determined by an independent evaluator
except in the case of series comprised principally of securities traded
on a national securities exchange or for which over-the-counter
quotations are readily available, in which case the unit price is based
on the closing sale prices of the underlying securities, as determined
by the Trustee.
4. Units purchased in the secondary market by the Sponsor may be
reoffered to the public, at a price generally based on the aggregate
bid side evaluation of the underlying securities plus the applicable
sales charge. Those units also may be presented to the Trustee for
redemption.
5. The Sponsor intends to allow Holders to exchange their units of
any series for units of other series of Funds in which a secondary
market is maintained (the ``Exchange Funds'') at a reduced sales charge
equal to 1.5% of the public offering price of units. Applicants reserve
the right to change these fixed charges subject to the terms and
conditions of rule 22d-1 and may otherwise modify, amend, or terminate
the Exchange Option, provided that the existing Holders will be given
prior notice if required by condition 1 below.
6. The Exchange Option would operate in a manner similar to any
secondary market transaction except for the reduced sales charge. The
Exchange Option would be available only on series for which the Sponsor
is maintaining a secondary market. The Sponsor does not currently
anticipate that the Exchange Option would be offered with respect to
units of any series currently available on original issue but may
permit such exchanges in the future.
7. The Exchange Option would permit the Holder to acquire only
those units which the Sponsor has acquired in the secondary market and
has legally available for sale in the state in which the Holder
resides. Exchanges would be effected for whole units only, but if the
cash proceeds of units exchanged is insufficient to acquire an even
number of whole units of the Exchange Fund selected, the Holder would
be permitted to add cash sufficient to round up to the next higher
number of whole units of the Exchange Fund.
8. The applicable sales charge for units exchanged within five
months from the date of purchase for units of an Exchange Fund with a
higher sales charge than that paid on the units being exchanged, will
be the greater of the exchange fee, or an amount (``Alternative
Charge'') that together with the sales charge actually paid on the
acquisition of units being exchanged, equals the sales charge
applicable to the direct purchases of the quantity of Exchange Fund
units being acquired, determined as of the date of the exchange.
9. The Sponsor proposes to offer the Conversion Option to holders
of registered unit investment trusts (other than the Exchange Funds)
(the ``Conversion Holders'') which are offered at a maximum applicable
sales charge of at least 3% of the public offering price (``Conversion
Trusts'') under the terms essentially identical to the Exchange Option
as described above. All Conversion Holders would be eligible to
participate in the Conversion Option, regardless of whether they are or
were retail customers of the Sponsor or whether the Sponsor
participated as an underwriter or selling dealer in the original public
offering of units of the Conversion Trust.
10. The Conversion Holder would order his or her broker to sell
those units by presentation to the trustee of his or her trust and to
apply the proceeds to purchase whole units of an Exchange Fund
available in the secondary market. The broker must certify to the
Sponsor that the purchase is pursuant to the Conversion Option and
therefore eligible for the reduced sales charge.
11. The Sponsor intends to hold the Conversion Option open under
most circumstances. Applicants, however, reserve the right to modify,
suspend, or terminate the Conversion Option at any time without further
notice. The reduced sales charge for the Conversion Option will be
identical to that for the Exchange Option. The Sponsor also reserves
the right to change the reduced sales charge from time to time subject
to rule 22d-1. The Alternative Charge also would apply to the exercise
of the Conversion Option within five months of purchase of the units
exchanged.
B. The Section 14(a) Exemption
1. The Sponsor states that each series to be covered by the
requested order is intended to, at the date of deposit of the
underlying securities and before any unit is offered to the public,
have a net worth far in excess of $100,000. Each of these series also
contemplates subsequent deposits of securities in connection with the
creation of additional units, maintaining to the extent practicable the
original proportionate relationship among the number of shares of each
security as originally deposited.
Applicants' Legal Analysis
A. The Exchange and Conversion Options
1. Applicants are prohibited by sections 11 (a) and (c) from making
an offer to Holders to exchange units for the securities of any other
investment company unless the terms of offer have first been submitted
to and approved by the SEC.
2. With respect to the Exchange Option, applicable believe that the
reduced sales charge is a reasonable and justifiable expense to be
allocated for the professional assistance and operational expenses
contemplated in connection with the option. Applicants further believe
that the Alternative Charge is appropriate in order to maintain the
equitable treatment of various investors in each series.
3. With respect to the Conversion Option, applicants believe that
it should have little or no competitive effect on the unit investment
trust market. Applicants state that Conversion Holders will not be
induced or encouraged to participate in the Conversion Option through
the active advertising or sales campaign. The Sponsor recognizes its
responsibility to its customers against generating excessive
commissions through churning.
B. The Section 14(a) Exemption
1. Section 14(a) provides, in pertinent part, that no registered
investment company shall make a public offering of its securities
unless such company has a net worth of at least $100,000 or certain
undertakings are included in the investment company's registration of
its securities under the 1933 Act to ensure, among other things, that
the company has a net worth of $100,000 within 90 days after the
registration statement becomes effective.
2. Rule 14a-3 exempts unit investment trusts from the provisions of
section 14(a) if they are ``engaged exclusively in the business of
investing in eligible trust securities'' as defined in the rule. Most
of the series are engaged in the business of investing in eligible
trust securities. However, a series holding corporate securities other
than fixed rate non-convertible bonds and preferred stocks would not be
engaged and the exemption under the rule would not be available.
Accordingly, applicants request an exemption from section 14(a) for
each series that does not exclusively hold ``eligible trust
securities.''
C. Section 6(c)
1. Applicants believe that the granting of the requested order is
necessary and 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 within the meaning of section 6(c).
Applicants' Conditions for the Exchange and Conversion Offers
Applicants agree to the following as conditions to the requested
order:
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 Exchange
Fund under section 22(e) of the Act and the rules and regulations
thereunder, or
ii. An Exchange Fund 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 sales charge collected at the time of any exchange or
conversion shall not exceed 1.5% of the public offering price of the
unit being acquired on each exchange.
3. The prospectus of each Exchange Fund 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.
Applicants' Conditions for Relief from Net Worth Requirements
Applicants agree to the following as conditions to the requested
order:
1. The Sponsor will refund, on demand and without deduction, all
sales charges to purchasers of units of any of these series from the
Sponsor or from any underwriter or dealer participating in the
distribution, and liquidate the securities held by that series and
distribute the proceeds thereof, if, within ninety days from the time
that the registration statement relating to the units thereof shall
have become effective under the 1933 Act, the net worth of the series
shall be reduced to less than $100,000 or if the series shall have been
terminated.
2. The Sponsor will instruct the Trustee to terminate any series in
the event redemption by the Sponsor of units which have not been sold
in the initial distribution thereof results in the series having a net
worth of less than 40% of the net worth of securities in its original
portfolio, and in the event of any such termination the Sponsor will
refund, or demand and without deduction, all sales charges to purchases
of units of that series from the Sponsor or from any underwriter or
dealer participating in the distribution.
3. The Sponsor agree to require any future sponsor, as a condition
to becoming a sponsor, to agree to the foregoing undertakings.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-12391 Filed 5-19-94; 8:45 am]
BILLING CODE 8010-01-M
