[Federal Register Volume 60, Number 144 (Thursday, July 27, 1995)]
[Notices]
[Pages 38598-38601]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18473]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21222; 812-7895]
Applications, Hearings, Determinations, etc.: Morgan Stanley &
Co., Inc. et al.
July 21, 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: Morgan Stanley & Co. Incorporated (``Morgan Stanley''),
Technology Equity and Income Trust (the ``Trust''), and any future
closed-end investment company underwritten by Morgan Stanley (together
with the Trust, the ``Trusts'') that invests in Listed Securities (as
defined below), is structured in a manner identical in all material
respects to the Trust, and is authorized to write call options on its
portfolio of securities.
RELEVANT ACT SECTIONS: Order requested under sections 6(c) and 17(b)
granting an exemption from section 17(a)(2).
SUMMARY OF APPLICATION: Applicants seek an order to permit Morgan
Stanley, the principal underwriter for the Trusts, and other principal
underwriters of the Trusts, to purchase call options on securities held
by the Trusts.
FILING DATES: The application was filed on March 30, 1992, and amend on
June 30, 1992, September 28, 1992, February 9, 1993, August 23, 1994,
and March 7, 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 August 15, 1995,
and should be accompanied by proof of service on the 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 a hearing may request notification by writing to the SEC's
Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549.
Applicants: Technology Equity and Income Trust, c/o The Bank of New
York, 101 Barclay Street, 21st Floor West, New York, New York 10286;
Morgan Stanley & Co. Incorporated, 1251 Avenue of the Americas, New
York, New York 10020.
FOR FURTHER INFORMATION CONTACT: 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 may be obtained for a fee at the
SEC's Public Reference Branch.
Applicants' Representations
1. The Trusts will be registered, non-diversified, closed-end
management investment companies. The Trusts will hold a portfolio of
securities subject to call options and stripped U.S. Treasury
securities (``Treasury Securities''). The portfolio securities must be
registered under section 12 of the Securities Exchange Act of 1934, and
listed on the New York Stock Exchange, the American Stock Exchange
(other than Emerging Company Marketplace securities (``ECM
Securities'')), or traded on the NASDAQ-National Market System
(provided the NASDAQ-NMS securities satisfy the listing requirements of
the New York Stock Exchange or the American Stock Exchange (other than
the listing requirements applicable to ECM Securities)) (Collectively,
the ``Listed Securities''). Interests in the Trusts will be called STEP
Units. The Trusts' objectives will be to provide current quarterly cash
distributions from the proceeds of the Treasury Securities and regular
cash dividends on the Listed Securities, and the potential for capital
appreciation up to a disclosed maximum on the Listed Securities. The
final composition of a Trust's portfolio will be determined at the
close of trading on the way prior to the commencement of the offering
of STEP Units (the ``Determination Date''). The Trusts will acquire
their portfolios in the manner described below.
2. Each Trust will invest in Listed Securities using the gross
proceeds received from the sale of its STEP Units to the underwriters.
The trustees of each Trust (the ``Trustees''), with the advice of an
investment adviser (the ``Investment Adviser''), will select the
specific Listed Securities for the respective Trust at least one
business day prior to the Determination Date. At the opening of the
market on the Determination Date, the Trustees will enter market buy
orders to purchase the Listed Securities with unaffiliated brokers or
dealers selected by the Trustees with the advice of the Trust's
Investment Adviser.
3. Immediately after the purchase of the Listed Securities, the
Trusts will sell a single call option on each issue of Listed
Securities (each option is referred to as a ``Contract''). Each Trust
will invest the net proceeds from the sale of the Contracts in Treasury
Securities which will mature on a quarterly basis over the life of the
Trust. Unitholders will receive quarterly distributions which consist
of the proceeds received from the Treasury Securities as they mature
and regular cash dividends on the Listed Securities. The expenses of a
Trust, including any underwriting commissions on the sale of STEP
Units, will be deducted from the proceeds from the sale of its
Contracts.
4. Each Contract will grant the Contract holder the right to
purchase the Listed Securities underlying the Contract at a fixed price
(the ``Exercise Price'') on a fixed date (the ``Expiration Date''). The
Exercise Price for each Contract will range between 30% and 50% in
excess of the current market price of the Listed Securities on the
Determination Date. The Expiration Date will be no more than 3\1/2\
years after issuance.
5. The Contracts also will provide that the Exercise Price for each
Listed Security be reduced dollar-for-dollar by the per share amount of
(a) any Extraordinary Cash Dividend \1\ and (b)
[[Page 38599]]
any non-cash dividend or non-cash distribution on a Listed Security
that is taxable to security holders under federal income tax laws
valued as of the record date for the dividend or distribution. If on or
prior to the Expiration Date the Exercise Price for a Listed Security
has been reduced to zero or below, the Contract holder shall be deemed
to have exercised its purchase rights under the Contract on that date.
The Trust will deliver to the Contract holder the Listed Security and
any Extraordinary Cash Dividend or non-cash dividend that caused the
Exercise Price to fall below zero.
\1\ An ``Extraordinary Cash Dividend'' will be defined, with
respect to any Listed Security, as a dividend which exceeds the
immediately preceding non-Extraordinary Cash Dividend on the Listed
Security by an amount equal to at least 10% of the closing sale
price of the Listed Security on the business day preceding the ex-
dividend date for the current dividend.
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6. If on or prior to the Expiration Date, (a) a merger or
consolidation of a Listed Security's issuer is consummated and the
issuer is not the surviving party, or (b) a successful tender or
exchange offer is made for at least a majority interest in the issuer
of a Listed Security, the Contract holder for that Listed Security will
have the right for five business days, beginning on the date of
consummation of the merger or consolidation or the date the Security is
accepted for payment under the tender or exchange offer, to accelerate
its purchase rights under the Contract. After this period, the rights
of the Contract holder will expire.
7. The Contracts will be sold to major broker/dealers and/or
financial institutions (which may include Morgan Stanley or other
principal underwriters of the Trusts) through a bidding procedure
described in detail Conditions 1 and 2 below. Because all the terms of
the Contracts will be set (i.e., Expiration Date, Exercise Price (as a
percentage of the then-current price of the underlying Listed
Security), termination provisions, adjustments for extraordinary
events, etc.), bidding on a Contract will consist solely of the
submission of a bid price expressed as a percentage of the then-current
price of the underlying security. Each bidder will be permitted to bid
for all of the Contracts on an aggregate basis and/or submit a separate
bid on each. Subject to certain conditions described below, the
Trustees will sell the Contracts in the manner best calculated to
maximize the net proceeds to the Trust.
8. The administration and operation of the Trusts will be overseen
by three Trustees, none of whom are interested persons as defined in
section 2(a)(19) of the Act. A bank having the qualifications described
in section 26(a) of the Act will perform the daily administration of
the Trusts (the ``Administrator''). In addition, the Administrator will
act as the Trusts' custodian, paying agent, registrar, and transfer
agent. The Administrator will not be a principal underwriter or
affiliated person of the Trusts, or an affiliated person of a principal
underwriter or affiliated person.
9. The Investment Adviser for each Trust will be unaffiliated with
Morgan Stanley and any other principal underwriter of the Trust, will
be an established entity, registered as an investment adviser under the
Investment Advisers Act of 1940 and will have significant assets under
its management. The Investment Adviser will advise the Trustees in
connection with the composition and acquisition of the initial
portfolio of the Trusts, and thereafter, the Trustees may consult with
the Investment Adviser concerning the disposal of the Listed Securities
in the instances described below where the Trustees have the discretion
to dispose of them.
10. The Trusts will terminate on or shortly after the Expiration
Date. Each Trust's prospectus will specify that the Trust intends to
hold each Listed Security and any distributions thereon until the
Expiration Date. However, each Trust will be required to distribute
cash or dispose of any securities it receives and distribute the
proceeds to unitholders if (a) an issuer of a Listed Security pays a
non-cash dividend or makes a non-cash distribution that is taxable to
its security holders under federal income tax laws, (b) an issuer of a
Listed Security is acquired, whether in a cash merger or a merger
involving the distribution of securities, or is a party to a
consolidation where it is not the surviving party, (c) there is a
tender or exchange offer for at least a majority interest in an issuer
of a Listed Security; however, if the offer is unsuccessful, the Trust
will withdraw the Listed Securities it has previously tendered, and if
only a portion of the Trust's shares are purchased, the Trust will be
required to sell the balance of its shares in the market, or (d) an
issuer of a Listed Security declares a cash dividend or makes a cash
distribution. In addition, any time security holders may elect cash
consideration, the Trust will be required to elect to receive cash and
distribute it to unitholders. Each Trust will retain any securities or
property obtained in a stock split, reverse stock split, or tax-free
non-cash dividend or distribution declared or made by any issuer of a
Listed Security. Any retained securities or property will, together
with the related Listed Security, be subject to purchase by the holder
of the Contract related to that Listed Security.
11. The Trustees may dispose of a Listed Security and distribute
the proceeds to unitholders if (a) the Listed Security's market price
falls to less than 50% of its market price on the Determination Date,
or (b) the issuer of the Listed Security becomes bankrupt, insolvent,
or defaults on amounts due on its outstanding securities. In these
instances, the Contract holders will have agreed to negotiate in good
faith with the Trustees the early termination of the Contracts. Except
under the above circumstances, the Contract holders will not have an
opportunity to seek to negotiate an early termination of the Contracts.
Applicants' Legal Analysis
1. Applicants request an order under sections 6(c) and 17(b)
exempting them from section 17(a)(2) of the Act to permit Morgan
Stanley and other principal underwriters of the Trusts to purchase the
Contracts. Section 17(a)(2) of the Act, in part, prohibits an
affiliated person of or a principal underwriter for a registered
investment company, acting as principal, from purchasing any security
or other property from the registered company (except securities of
which the seller is the issuer). Since the sale of an option may be
viewed as a sale of the underlying security, section 17(a)(2) prohibits
the Trusts' principal underwriters from purchasing the Contracts.
Section 17(b) of the Act provides, however, that the Commission may
exempt a transaction from the provisions of section 17(a) if evidence
establishes that the terms of the proposed transaction, including the
consideration to be paid or received, are reasonable and fair and do
not involve overreaching on the part of any person concerned, and that
the proposed transaction is consistent with the policy of the
registered investment company concerned and with the general purposes
of the Act. Section 6(c) provides that the Commission may conditionally
or unconditionally exempt any person, security or transaction, or any
class or classes of persons, securities or transactions, from any
provision of the Act or any rule or regulation thereunder, if and 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. The market for the Contracts is the over-the-counter options
market. Morgan Stanley believes that it is one of only a small number
of firms that are
[[Page 38600]]
active and frequent participants within the U.S. over-the-counter
market segment that would include the Contracts. Applicants believe
that to preclude Morgan Stanley and other principal underwriters of a
Trust from bidding for the Contracts may prevent a Trust from receiving
the best price because it would exclude the bid of entities who might
pay a price somewhat higher than the market price since they had the
most to gain from the successful marketing of the Trust, and because
there would be a perceived lack of competition if independent bidders
are aware that major participants in the over-the-counter options
market are excluded from bidding. Applicants assert that the
competitive bidding process has a direct affect on the quarterly
distributions to unitholders since the amount of Treasury Securities
purchased will depend upon the amount of the proceeds received from the
sale of the Contracts. Accordingly, applicants submit that providing
the Trusts with access to all major dealers is in the best interests of
the Trusts, its holders, and is consistent with the general purposes of
the Act.
3. Applicants believe that Morgan Stanley's dual role as
underwriter and bidder for the Contracts would not give it an advantage
in structuring the Contracts or assessing their value. The participants
in the over-the-counter options market are various sophisticated,
established, well-capitalized financial institutions including major
investment banking firms, money center banks, insurance companies, and
their affiliates. These sophisticated institutions employ almost
identical valuation models and technology to price options. Prospective
bidders will have a copy of a Trust's prospectus and draft of the
Contract at least two business days prior to the day the final bids are
due. Although the Contracts will not be typical over-the-counter
options, they are not of such a customized nature to make it unlikely
for other broker/dealers or financial institutions to submit bids. The
Contract's form will be similar to other types of call options used in
privately negotiated transactions. Since all of the Contracts' terms
have been set, other than price, the bidding procedure has been made as
simple as possible. Accordingly, the notice period and information
provided in the bidding process are sufficient to ensure competitive,
bona fide bids.
4. Applicants assert that the bidding procedures to be followed by
Morgan Stanley or any other principal underwriter in purchasing the
Contracts, as set forth in Applicants' Conditions below, will be
consistent with the standards of sections 17(b) and 6(c). These
procedures ensure that the Trusts receive the best price and execution
on the sale of the Contracts and ensure against any overreaching on the
part of any party concerned.
5. Lastly, each prospectus will fully disclose that the Contracts
will be offered by competitive bid and that Morgan Stanley, and to the
extent applicable, any other underwriter, will be among the bidders.
Applicants' Conditions
Applicants agree to the following as conditions to the requested
order:
1. The Trustees will select prospective bidders on the basis of
such factors as having the necessary capital to purchase Contracts,
having the ability to appropriately price the Contracts and being a
major participant in the over-the-counter options market. The Contracts
will be offered by competitive bid to not less than four major broker-
dealers and/or financial institutions who are in the business of making
bids on over-the-counter options, at least three of whom are not
affiliated persons or principal underwriters of a Trust or affiliated
persons or a principal underwriter or affiliated person. At least two
business days prior to the date and time that final bids are due, the
Trustees will contact prospective bidders, indicate when bidding for
the Contracts will commence and invite them to bid. The Trustees will
supply prospective bidders with a draft invitation to bid summarizing
the terms of the Contract, a copy of the Trust's prospectus and a draft
of the Contract. On the business day before final binding bids are due,
the Trustees will send a formal notice to prospective bidders. The
notice will indicate where and at what time final binding bids are due.
No bidder, including Morgan Stanley, will have access to any bids until
after the Contracts are awarded. Subject to condition 2 below, the
Trustees will sell the Contracts in the manner best calculated to
maximize net proceeds to the Trust (e.g., on an aggregate or individual
basis).
2. No sale of Contracts by a Trust will be made to Morgan Stanley
or another principal underwriter unless (a) if Morgan Stanley or
another principal underwriter submits separate bids on individual
Contracts, the Trustees receive and document for each Contract bid for
by Morgan Stanley or the other principal underwriter at least two bona
fide bids from major broker dealers and/or financial institutions who
are not affiliated persons or principal underwriters of the Trust or
affiliated persons of a principal underwriter or affiliated person, and
(b) if Morgan Stanley or another principal underwriter submits bids for
all of the Contracts on an aggregate basis, the Trustees receive and
document for all Contracts in the aggregate at least two bona fid bids
from major broker dealers and/or financial institutions who are not
affiliated persons or principal underwriters of the Trust or affiliated
persons of a principal underwriter or affiliated person, and the
Trustees determine that either the bid price on an individual Contract
or the aggregate bid price, as the case may be, offered by Morgan
Stanley or any other underwriter will maximize net proceeds to the
Trust. In the event of a tie, the bidders would be permitted to submit
one last bid. If there were still a tie following submission of the
last bid, the Contracts in question would not be sold to Morgan Stanley
or any other principal underwriter.
3. The Administrator, under the supervision of the Trustees, will
maintain sufficient records to verify compliance with the conditions of
the order. Such records will include the following: (a) The basis upon
which the Trustees selected prospective bidders; (b) all bidders
contacted; (c) all bidders to whom a bidding form was sent; (d) all
bids received; (e) the bidder who was awarded the Contracts; (f) the
winning bid prices; and (g) whether the bidders were principal
underwriters of the Trust, affiliated persons of the Trust, or
affiliated persons of a principal underwriters or affiliated person.
All records will be maintained and preserved in the same manner as
records required under Rule 31a-1(b)(1) of the Act.
4. Morgan Stanley's legal department, and the legal departments of
any parties relying on this order, will prepare guidelines for
personnel to make certain that transactions conducted pursuant to the
order comply with the conditions set forth in the order and that the
parties generally maintain arm's length relationships.
5. The underwriting allocations will be determined at least one
business day prior to the day the Trustees invite financial
institutions to bid and will not in any way be based on participation
in the bidding process.
6. Morgan Stanley, or any party relying on this order, will not
have any involvement with respect to the Trustees' selection of
prospective bidders or the bids accepted by the Trustees and will not
attempt to influence or control in any way the sale of the Contracts to
principal
[[Page 38601]]
underwriters aside from placing its own bid for the Contracts.
7. The Trustees of each Trust, including a majority of
noninterested Trustees, have or will have approved the Trust's
participation in transactions conducted pursuant to the exemption and
have or will have determined that such participation by the Trust is in
the best interests of the Trust and its unitholders. The minutes of the
meeting of the Board of Trustees at which this approval was or will be
given reflect or will reflect in detail the reasons for the Trustee's
determination.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-18473 Filed 7-26-95; 8:45 am]
BILLING CODE 8010-01-M
