[Federal Register Volume 60, Number 164 (Thursday, August 24, 1995)]
[Notices]
[Pages 44103-44104]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21046]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21314; 812-9520]
Merrill, Lynch, Pierce, Fenner & Smith Incorporated, et al.
August 18, 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: Merrill Lynch, Pierce, Fenner & Smith Incorporated
(``Merrill Lynch''), Smith Barney Inc., Prudential Securities
Incorporated, Dean Witter Reynolds Inc., and PaineWebber Incorporated
(the ``Sponsors''); and Defined Asset Funds--Municipal Investment Trust
Fund, Liberty Street Trust Municipal Monthly Payment Series, Defined
Asset Funds--Municipal Income Fund (``DAF-MIF''), and Municipal
Investment Trust Fund (the ``Trusts'').
RELEVANT ACT SECTIONS: Order requested under sections 6(c) and 17(b) of
the Act that would exempt applicants from section 17(a) of the Act.
SUMMARY OF APPLICATION: Applicants request an order to permit the
trustees of certain unit investment trusts to place orders to sell
municipal bond portfolio securities of the trusts with the trust
sponsors, who then will serve as introducing dealers. As introducing
dealers, the sponsors will retain a clearing broker to sell the
securities for the trusts through a wire service.
FILING DATE: The application was filed on March 13, 1995 and amended on
July 20, 1995 and August 17, 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 September 12,
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 may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549.
Applicants, c/o Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Unit Investment Trusts, P.O. Box 9051, Princeton, New Jersey 08543-
9051.
FOR FURTHER INFORMATION CONTACT:
Sarah A. Buescher, Staff Attorney, at (202) 942-0573, 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 from
the SEC's Public Reference Branch.
Applicants' Representations
1. Each series of the Trusts is a separate unit investment trust
created under New York law by a trust indenture and agreement (``Trust
Agreement'') among one or more of the Sponsors, a trustee
(``Trustee''), and an evaluator. The investment objective of each
series is receipt of interest income exempt from federal income
taxation through investment in a fixed portfolio of interest-bearing
municipal bonds (``Bonds''). Applicants request that the order extend
to future unit investment trusts sponsored by one or more of the
sponsors.
2. The Sponsors intend to maintain a market for units of each Trust
and continuously offer to purchase those units at the redemption price.
If the Sponsors no longer maintain a secondary market, certificate
holders may redeem their units. If cash held by a Trust is insufficient
to pay any redemption, the Trustee is authorized to sell Bonds held by
the Trust. The Trustee also may sell Bonds to meet expenses. In
addition, the Sponsors may direct the Trustee to sell Bonds in specific
circumstances, such as a default by an issuer or the Bonds becoming
subject to federal income taxation.
3. Trustees have two principal methods for selling Bonds: (1) The
Trustee can approach several non-Sponsor dealers and sell to the non-
Sponsor dealer making the highest bid; or (2) the Trustee can place an
order to sell Bonds with one non-Sponsor dealer (``Introducing
Dealer''), who in turn retains a broker (``Clearing Broker'') to
communicate the availability of the Bonds by posting the offer on a
wire system with contact to 300 to 400 dealers. The Clearing Broker
receives the bids and selects the highest bidder. Applicants represent
that the latter method has obtained more favorable prices for the
Trusts because of the broader exposure to the bond offering by
potential purchasers. The Clearing Broker and the Introducing Dealer
retain a concession. Merrill Lynch has negotiated a fixed fee of $2 per
bond with independent Introducing Dealers. Pursuant to an SEC order
(Investment Company Act Release No. 14958) (Feb. 25, 1986)) (``1986
Exemption''), sales of Bonds from the Trusts may be made to any of the
Sponsors if, among other conditions, the Sponsor is the highest bidder.
DAF-MIF was not a party to this order.
4. Clearing Brokers only will accept transactions from Introducing
Dealers who are registered as broker-dealers under the Securities
Exchange Act of 1934 (``Exchange Act''). Since the Trustee is not a
registered broker-dealer, it must retain an Introducing Dealer who
receives a concession for writing an order and approaching a Clearing
Broker. Each of the Sponsors is a municipal securities dealer who acts
as Introducing Dealer in connection with non-Trust Bond sales.
5. Applicants represent that if the requested exemptive relief is
granted, not only would the Trusts continue to be permitted to effect
principal transactions with the Sponsors in selling Bonds from their
portfolios, but the conditions to the 1986 Exemption would be modified
to permit the Trusts to use Sponsors as Introducing Dealers in those
and other sale transactions. Merrill Lynch's Defined Asset Funds
Division will select a Sponsor to act as Introducing Dealer for a wire
service transaction for the Trusts only if it believes in good faith
that those Trusts are reasonably likely to receive a better execution
thereby.
6. Applicants represent that permitting the proposed transaction
will benefit the Trusts and the certificateholders. The Sponsors have
resources to bear the financial responsibility if a trade is not
completed properly and experience with wire service executions of
municipal securities transactions. Merrill Lynch believes that these
firms can be of substantial value in obtaining more timely and cost-
effective executions of wire service transactions for the Trusts. In
addition, with the continuing consolidation of major broker-dealers, if
the Sponsors continue to be excluded from acting as Introducing
Dealers, the Trusts are likely to be permitted only to use smaller,
less capitalized firms, which applicants believe may result in less
favorable prices and execution for the Trusts.
[[Page 44104]]
7. Merrill Lynch submits that the fee of $2 per Bond that it has
negotiated with independent Introducing Dealers is reasonable
compensation for performing these services. Because Bonds can only be
sold under limited circumstances specified in the Trust Agreement, a
Sponsor could not cause a Trust to sell Bonds merely to generate
commissions. Applicants represent that the Trustee and Merrill Lynch
will monitor currently prevailing rates of Introducing Dealers to
assure that the Trusts are charged no more than the current rates.
8. The requested relief would amend the 1986 Exemption in several
respects. First, applicants request that the relief granted in the 1986
Exemption, amended as requested herein, be extended to DAF-MIF. Second,
applicants request that the first condition of the 1986 Exemption be
deleted. This condition reads as follows:
Merrill Lynch will not advise the [Merrill Lynch, White Weld
Capital Markets] Group or the municipal securities dealer department
of any other Sponsor when giving instructions to sell a Municipal
Bond.
Since a municipal dealer's trading department (which may make bids to
purchase the Bonds) is generally not separate from the personnel who
act as Introducing Dealers on wire services transactions, applicants
wish to delete this condition. Applicants also request to amend other
conditions so as to permit any Sponsor to act as an Introducing Dealer.
Applicants represent that the transactions would remain anonymous even
if a Sponsor is both the Introducing Dealer and a purchasing dealer
since the transaction would be effected through the Clearing Broker, an
independent party.
Applicant's Legal Analysis
1. Applicants request an order under sections 6(c) and 17(b) of the
Act from section 17(a) to permit a Sponsor to purchase Bonds from the
Trustee as an Introducing Dealer. Section 17(a) of the Act generally
makes it unlawful for an affiliated person of a registered investment
company, acting as principal, knowingly to purchase securities from the
company.
2. Section 17(b) permits the SEC to 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
policy of each registered investment company concerned; and (c) the
proposed transaction is consistent with the general purposes of the
Act. Under section 6(c), the SEC may exempt classes of 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 believe that the proposed transactions satisfy the
requirements of sections 6(c) and 17(b).
3. Applicants state that the regulations to which the Sponsors and
the Trusts are subject, the provisions of the Trust Agreement, and the
conditions stated below will prevent any overreaching. Because the
price received by the Trust upon the sale of a security depends on bids
made by purchasing dealers through the wire service, the Sponsor cannot
influence the price received by the Trust. The Sponsors are registered
as municipal securities dealers, and acknowledge that they are subject
to the rules of the Municipal Securities Rulemaking Board (``MSRB''),
which require members to deal fairly with all persons and to use
reasonable efforts to obtain a fair and reasonable price. Merrill Lynch
has agreed, and each Sponsor before acting as Introducing Dealer for
any Trust will agree, to make available for ready inspection by the SEC
all records required to be kept by applicants relating to the proposed
transactions pursuant to the Exchange Act and MSRB rules.
4. Applicants represent that the sales will be consistent with the
policy of the selling series, as recited in its registration statement
and Trust Agreement.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. The Clearing Broker will in all cases be not affiliated with any
Sponsor.
2. Offers will be made through a major wire service in municipal
bonds and will be kept open for three hours after initial appearance on
the wire, to be reduced to not less than two hours in the discretion of
the Clearing Broker in a declining market.
3. A Sponsor's bid will be accepted only if a minimum of three bids
are received from persons other than a Sponsor or its affiliates.
4. The Trustee will be instructed not to inquire as to the identity
of a bidding dealer, and if it receives such information, will not
transmit it to any Sponsor or its agents.
5. Clearing Brokers effecting the sales will be instructed to
obtain the best available price and execution and will instruct the
wire services not to report any bid from a Sponsor unless it is higher
than the best price available from non-affiliated broker-dealers.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-21046 Filed 8-23-95; 8:45 am]
BILLING CODE 8010-01-M
