[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