[Federal Register Volume 62, Number 145 (Tuesday, July 29, 1997)]
[Notices]
[Pages 40556-40559]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19836]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel No. IC-22758; 812-10626]
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill
Lynch Government Securities, Inc.; Notice of Application
July 22, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (the ``Act'').
-----------------------------------------------------------------------
APPLICANTS: Merrill Lynch, Pierce, Fenner & Smith Incorporated
(``Merrill Lynch'') and Merrill Lynch Government Securities, Inc.
(``GSI'').
RELAVANT ACT SECTIONS: Order requested under section 12(d)(1)(J) for an
exemption from section 12(d)(1), under section 6(c) for an exemption
from section 14(a), and under section 17(b) for an exemption from
section 17(a).
SUMMARY OF APPLICATION: Applicants request an order with respect to
Structured Yield Product Exchangeable for Stock Trusts and future
trusts that are substantially similar and for which Merrill Lynch will
serve as a principal underwriter (the ``Trusts'') that would (a) permit
other registered investment companies to own a greater percentage of
the total outstanding voting stock (the ``Securities'') of any Trust
than that permitted by section 12(d)(1), (b) exempt the Trusts from the
initial net worth requirements of section 14(a), and (c) permit the
Trusts to purchase U.S. government securities from Merrill Lynch and/or
GSI at the time of a Trust's initial issuance of Securities.
FILING DATES: The application was filed on April 21, 1997, and amended
on July 18, 1997.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a heari8ng 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, 1997,
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 Fifth Street, N.W., Washington, D.C.
20549. Applicants, World Financial Center, North Tower, 250 Vesey
Street, New York, New York 10281-1318.
FOR FURTHER INFORMATION CONTACT: Brian T. Hourihan, Senior Counsel, at
(202) 942-05267, 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.
Applicants' Representations
1. Each Trust will be a limited-life, grantor trust registered
under the Act as a non-diversified, closed-end management investment
company. Merrill Lynch 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, (a)
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 (b) 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 applicants.
The investment objective of each Trust will be to provide to each
holder of Securities (``Holder'') (a) current cash distributions from
the proceeds of any Treasuries, and (b) participation in, or limited
exposure to, changes in the market value of the underlying Shares.
---------------------------------------------------------------------------
\1\ No Trust will hold Contracts relating to the Shares of more
than one issuer. (p.5, n.3)
---------------------------------------------------------------------------
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
thereof, 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 such 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 thereof, 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\
---------------------------------------------------------------------------
\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. (p.6)
\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 terminaiton of each Trust. (p.7, n.5)
---------------------------------------------------------------------------
4. Securities issued by the Trusts will be listed on a national
securities exchange or trade on the National Association of Securities
Dealers Automated Quotation 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. Mrerrill Lynch currently
[[Page 40557]]
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 any separate investment adviser. The trustees will have 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 a paying agent,
registrar, and transfer agent with respect to the Securities of each
Trust. 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 Merrill Lynch or
such bank.
6. The Trusts will be structured so that the trustees are not
authorized to sell the Contracts or Treasuries under any circumstances.
The Trusts will hold such Contracts until maturity, 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, the obligations of such counterparty under the Contract will be
accelerated and the available proceeds thereof will be distributed to
the Security Holders.
7. The trustees of each Trust will be selected initially by Merrill
Lynch, together with any other initial Holders, or by the grantors of
such 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.
---------------------------------------------------------------------------
\4\ A ``majority of the Trust's outstanding Securities'' means
the lesser of (a) 67% of the Securities represented at a meeting at
which more than 50% of the outstanding Securities are represented,
and (b) more than 50% of the outstanding Securities. (p. 10)
---------------------------------------------------------------------------
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 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 in respect thereof) until
receipt by them of the Shares at the time the Trust is liquidated.
9. Each Trust will be structed so that its organizational and
ongoing expenses will not be borne by the Holders, but rather, directly
or indirectly, by Merrill Lynch, 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 Merrill Lynch).
Applicants' Legal Analysis
A. Section 12(d)(1)
1. Section 12(d)(1)(A)(i) of the Act prohibits any registered
investment company from owning more than 3% of the total outstanding
voting stock of any other investment company. 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, such exemption is consistent with the public
interest and protection of investors.
3. Applicants believe, in order for the Trust 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. Applicants state that large investment companies and
investment company complexes seek to spread the fixed costs of
analyzing specific investment opportunities by making sizable
investments in those opportunities that prove attractive. Conversely,
it may not be economically rational for such investors, or their
advisers, to take the time to review an investment opportunity if the
amount that they would ultimately be permitted to purchase is
immaterial in light of the total assets of the investment company or
investment company complex. Therefore, applicants argue that, in order
for the Trusts to be economically attractive to large investment
companies and investments company complexes, such investors must 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). Applicants request
that the SEC issue an order under section 12(d)(1)(J) exempting the
Trusts from such limitations.
4. Applicants state that section 12(d)(1) was enacted in order to
prevent one investment company from buying control of other investment
companies and creating complicated pyramidal structures. Applicants
also state that section 12(d)(1) was intended to address two principal
categories of problems: those associated with the ``pyramiding'' of
control over portfolio funds by fund-holding companies and the
layering-on of costs to investors.
5. The pyramiding concerns fall into two categories. One arises
from the potential for undue influence resulting from the pyramiding of
voting control of the acquired investment company. Applicants believe
that this concern generally does 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, applicants argue that any concerns regarding undue
influence will be eliminated by including a provision in the charter
documents for the Trusts that will require that 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) will vote their
Securities in proportion to the votes of all other Holders.
6. The second concern with respect to pyramiding is that an
acquiring investment company might be able to influence unduly the
persons operating the acquired investment fund. This undue influence
could arise through a threat to redeem assets invested in the
underlying fund at a time, or in a manner, which is disadvantageous to
that fund, or to threaten to vote shares in that fund in a manner
inconsistent with the best interests of that fund and its shareholders.
Applicants believe that this concern does not arise in the case of the
Trusts because the Securities will not be redeemable and because the
trustees' management control will be so limited.
[[Page 40558]]
7. The second major objective of section 12(d)(1) is to avoid
imposing on investors the excessive costs and fees that may result from
multiple layers of investments. Excessive costs can result from
investors paying double sales charges when purchasing shares of a fund
which, in turn, invests in other funds, or from duplicative expenses
arising from the operation of two funds in place of one. Applicants
believe that neither of these concerns arises in the case of the Trusts
because of the limited on-going fees and expenses incurred by the
Trusts and the fact that generally such fees and expenses will be
borne, directly or indirectly, by Merrill Lynch 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. Applicants assert that such 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 Merrill Lynch, the counterparties, or other third
parties. Thus, a Holder will not pay duplicative charges to purchase
its investment in any Trust. Finally, there will be no duplication of
advisory fees because the Trusts will be internally managed by their
trustees.
8. Applicants believe 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, applicants assert
that the Securities are intended to provide Holders with a security
having unique payment and risk characteristics, including an
anticipated higher yield than the ordinary dividend yield on the Shares
at the time of the issuance of the Securities.
9. Applicants believe that the purposes and policies of the 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.
2. Applicants argue that, while the Trusts are classified as
management companies, they have the characteristics of unit investment
trusts that are relevant to the rule 14a-3 exemption. 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. Investors in the Trusts, like
investors in a traditional 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. Applicants
believe 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. Applicants state 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, and 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, applicants state 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. Applicants also do 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, 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. Applicants request that the SEC issue an
order under section 6(c) exempting the Trusts from any requirements of
section 14(a). Applicants believe that such 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 17(a)(2) of the Act generally prohibit the
principal underwriter, or any affiliated person of the principal
underwriter, of any 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
Merrill Lynch and/or GSI.
2. Section 17(b) of the Act provides that the SEC shall exempt a
proposed transaction from section 17(a) if evidence establishes that:
(a) the terms of the proposed transaction are reasonable and fair and
do not involve overreaching; (b) the proposed transaction is consistent
with the policies of the registered investment company involved; and
(c) the proposed transaction is consistent with the general purposes of
the Act. Applicants request an exemption from sections 17(a)(1) and
17(a)(2) to permit the Trusts to purchase Treasures from the
applicants.
3. Applicants state that the policy rationale underlying section
17(a) is the concern that an affiliated person of an investment
company, by virtue of such relationship, could cause an investment
company to purchase securities of poor quality from the affiliated
person or to overpay for any securities. Applicants argue that it is
unlikely that Merrill Lynch or GSI 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.
Applicants argue that because GSI is one of a limited number of primary
dealers in Treasuries, the applicants will be able to offer the Trusts
prompt execution of their Treasury purchases at very competitive
prices.
4. Applicants state that they are only seeking relief from section
17(a) with respect to the initial purchase of the Treasuries and not
with respect to an on-going course of business. Consequently, investors
will know before they purchase a Trust's Securities the Treasuries that
will be owned by the
[[Page 40559]]
Trust and the amount of the case payments that will be provided
periodically by the Treasuries to the Trust and distributed to Holders.
Applicants also assert that whatever risk there is of overpricing the
Treasuries will be borne by the counterparts and not by the Holders
because the costs of the Treasuries will be calculated into the amount
paid on the Contracts. Applicants argue 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. Applicants believe 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.
Applicants' Conditions
Applicants agree 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 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, (a) Will adopt procedures
that are reasonably designed to provide that the conditions set forth
below have been complied with; (b) will make and approve such changes
as deemed necessary; and (c) will determine that the transactions made
pursuant to the order were effected in compliance with such procedures.
3. The Trusts (a) Will maintain and preserve in an easily
accessible place a written copy of the procedures (and any
modifications thereto), and (b) will maintain and preserve for the
longer of (i) the life of the Trusts and (ii) 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 Merrill Lynch or GSI, 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 thereof on the
part of any person concerned.
6. The fee, spread, or other remuneration to be received by Merrill
Lynch and/or GSI 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 is at least as favorable as that available from other
sources. This shall 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.
Jonathan G. Katz,
Secretary.
[FR Doc. 97-19836 Filed 7-28-97; 8:45 am]
BILLING CODE 8010-01-M
