[Federal Register Volume 64, Number 144 (Wednesday, July 28, 1999)]
[Notices]
[Pages 40915-40918]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-19223]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 23917; 812-11628]
Deutsche Bank Securities Inc.; Notice of Application
July 21, 1999.
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: Deutsche Bank Securities Inc. (``Deutsche
Securities'') requests an order with respect to the METS trusts (``METS
Trusts'' \1\ and future trusts that are substantially similar to the
METS Trusts and for which Deutsche Securities 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 section 3(c)(1) or (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 Deutsche Securities at the time of a
Trust's initial issuance of Securities.
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\1\ ``METS'' is an acronym for Mandatory Exchangeable Trust
Securities.
FILING DATE: The application was filed on May 19, 1999. Applicant has
agreed to file an amendment during the notice period, the substance of
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which is reflected in the notice.
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
Deutsche Securities 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
16, 1999, and should be accompanied by proof of service on Deutsche
Securities, 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-
0609. Applicant, 1 South Street, Baltimore, Maryland 21202.
FOR FURTHER INFORMATION CONTACT:
Bruce R. MacNeil, Staff Attorney, at (202) 9420634, or Nadya B.
Roytblat, Assistant Director, 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
20549-0102 (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. Deutsche Securities will serve as a principle 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,\2\ 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 Deutsche
Securities. The investment objective of each Trust will be to provide
to each holder of Securities (``Holder'') (i) periodic 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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\2\ 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.\3\ 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.\4\
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\3\ 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.
\4\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 Trusts 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. Deutsche
Securities currently intends, but will not be obligated, to
[[Page 40916]]
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 or banks
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. Any such 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 Deutsche Securities or by 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 certain events 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 events provided for in the Contract, the obligations of the
counterparty under the Contract may be accelerated and the available
proceeds of the Contract will be distributed to the Holders.
7. The trustees of each Trust will be selected initially by
Deutsche Securities, 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 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'' \5\ 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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\5\ 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 will 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 expenses will not be borne by the Holders, but rather, directly
or indirectly, by Deutsche Securities, 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 Deutsche Securities).
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 expected 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) and (c)(7)(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, the exemption is consistent with the public interest and
protection of investors.
3. Deutsche Securities states that, in order for the Trusts to be
marketed most successfully, and to be traded at a price that most
accurately reflects their value, it is necessary for the Securities of
each Trust to be offered to large investment companies and investment
company complexes. Deutsche Securities states that these investors seek
to spread the fixed costs of analyzing specific investment
opportunities by making sizable investments in those opportunities.
Conversely, Deutsche Securities 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
ultimate be permitted to purchase is immaterial in light of the total
assets of the investment company or investment company complex.
Therefore, Deutsche Securities 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). Deutsche Securities
requests that the SEC issue an order under section 12(d)(1)(J)
exempting the Trusts from the limitations.
4. Deutsche Securities 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. Deutsche
Securities also states that section 12(d)(1) was intended to address
the layering of costs to investors.
5. Deutsche Securities asserts 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, Deutsche Securities 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. Deutsche
Securities also states 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. Deutsche Securities states 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
[[Page 40917]]
because generally these fees and expenses will be borne, directly or
indirectly, by Deutsche Securities 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. Deutsche Securities 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 Deutsche Securities, 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. Deutsche Securities asserts 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, Deutsche Securities
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. Deutsche Securities 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 a eligible trust
securities shall be exempt from net worth requirement, provided that
the trust holds at least $100,000 of eligible trust securities at the
commence of a public offering.
2. Deutsche Securities argues that, while the Trusts are classified
as management companies, they have the characteristics of unit
investment 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 a disclosed portfolio that is held
until maturity. Deutsche Securities 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 ongoing commitment on the part
of the underwriter.
3. Deutsche Securities 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, Deutsche Securities 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. Deutsche Securities 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. Deutsche Securities request that the SEC
issue an order under section 6(c) exempting the Trusts from the
requirements of section 14(a). Deutsche Securities 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 Deutsche Securities.
2. Section 17(b) of the Act provides that 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. Deutsche Securities requests an exemption from
sections 17(a)(1) and (2) to permit the Trusts to purchase Treasuries
from Deutsche Securities.
3. Deutsche Securities 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. Deutsche Securities 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. Deutsche
Securities 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. Deutsche Securities 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. Deutsche Securities 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.
Deutsche Securities 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.
[[Page 40918]]
5. Deutsche Securities 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
Deutsche Securities 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 rare 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 Deutsche Securities, 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 not 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
Deutsche Securities 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
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 SEC, by the Division of Investment Management, pursuant
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-19223 Filed 7-27-99; 8:45 am]
BILLING CODE 8010-01-M
