[Federal Register Volume 59, Number 237 (Monday, December 12, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30467]


[[Page Unknown]]

[Federal Register: December 12, 1994]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20755; 812-8622]

 

PaineWebber Incorporated, et al.; Notice of application

December 6, 1994.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``Act'').

-----------------------------------------------------------------------

APPLICANTS: PaineWebber Incorporated (the ``Sponsor''); and Paine, 
Webber Municipal Bond Fund, The Municipal Bond Fund, The Corporate Bond 
Trust, PaineWebber Pathfinders Trust, The PaineWebber Federal 
Government Trust, and The PaineWebber Equity Trust (the ``Trusts'').

RELEVANT ACT SECTIONS: Order requested pursuant to section 6(c) for 
exemptions from sections 2(a)(32), 2(a)(35), 22(c), 22(d), and 
26(a)(2)(C) of the Act and rule 22c-1 thereunder, and pursuant to 
section 11(a) to amend two prior orders (the ``Prior Orders'') granting 
relief from section 11(c).\1\
---------------------------------------------------------------------------

    \1\Paine, Webber Municipal Bond Fund First Series, Investment 
Company Act Release Nos. 11301 (Aug. 12, 1980) (notice) and 11344 
(Sept. 10, 1980) (order); amended by Paine Webber Inc., Investment 
Company Act Release Nos. 14910 (Jan. 22, 1986) (notice) and 14945 
(Feb. 18, 1986) (order).

SUMMARY OF APPLICATION: Applicants seek to impose sales charges on a 
deferred basis and waive the deferred sales charge in certain cases, 
exchange Trust units having deferred sales charges, and exchange units 
of a terminating series of a Trust for units of the next available 
---------------------------------------------------------------------------
series of that Trust.

FILING DATE: the application was filed on October 15, 1993 and amended 
on June 23, 1994, August 19, 1994 and November 22, 1994.

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 January 3, 1995, 
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 who wish to be 
notified of the date of a hearing may request notification by writing 
to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street N.W., Washington, D.C. 
20549. Applicants, 1200 Harbor Boulevard, Weehawken, New Jersey 07087.

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 is available for a fee from the 
SEC's Public Reference Branch.

Applicants' Representations

    1. Each of the Trusts is a unit investment trust sponsored by the 
Sponsor. The Trusts are made up of one or more separate series 
(``Series''). Over five hundred Series have been created by the Trusts 
collectively.
    2. Each Series is created by a trust indenture among the Sponsor, a 
banking institution or trust company as trustee, and an evaluator. The 
Sponsor acquires a portfolio of securities and deposits them with a 
trustee in exchange for certificates representing fractional undivided 
interests in the portfolio of securities (``Units''). Units currently 
are offered to the public through the Sponsor and other underwriters 
and dealers at a price based upon the aggregate offering side 
evaluation of the underlying securities plus an up-front sales charge. 
The sales charge currently ranges from 4.75% to 2% of the public 
offering price, and is subject to reduction as permitted by rule 22d-1.
    3. Applicants seek an order under section 6(c) exempting them from 
sections 2(a)(32), 2(a)(35), 22(c), 22(d), and 26(a)(2)(C) and rule 
22c-1 thereunder to let them impose sales charges on Units on a 
deferred basis and waive the deferred sales charge in certain cases. 
Under applicants' proposal, the Sponsor will continue to determine the 
amount of sales charge per Unit at the time portfolio securities are 
deposited in a Series. The Sponsor will have the discretion to defer 
collection of all or part of this sales charge over a period following 
the purchase of Units. The Sponsor will in no event add to the deferred 
amount initially determined any additional amount for interest or any 
similar or related charge to reflect or adjust for such deferral.
    4. The Sponsor anticipates collecting a portion of the total sales 
charge immediately upon purchase of Units. A portion of the outstanding 
balance will be deducted periodically by the trustee from distributions 
on the Units and paid to the Sponsor until the total amount of the 
sales charge is collected. If distribution income is insufficient to 
pay a deferred sales charge installment, the trustee will have the 
ability under the trust indenture to sell portfolio securities in an 
amount necessary to provide the requisite payments. If a unitholder 
redeems or sells to the Sponsor his or her Units before the total sales 
charge has been collected from installment payments, the balance of the 
sales charge may be collected at the time of such redemption or sale.
    5. For purposes of calculating the amount of the deferred sales 
charge due upon redemption or sale of Units, it will be assumed that 
Units on which the balance of the sales charge has been collected from 
installment payments are liquidated first. Any Units disposed of over 
such amounts will be redeemed in the order of their purchase, so that 
Units held for the longest time are redeemed first.
    6. The Sponsor intends to waive collection of the unpaid balance of 
the deferred sales charge upon any sale or redemption of Units. If 
applicants later decide to collect the unpaid balance of the deferred 
sales charge upon sale or redemption, they may nonetheless waive 
payment of the balance of the deferred sales charge on redemptions or 
sales of Units in certain specific cases. Any such waiver will be 
disclosed in the prospectus and will satisfy the other conditions of 
rule 22d-1.
    7. The Sponsor believes that the operation and implementation of 
the deferred sales charge program will be disclosed adequately to 
potential investors as well as unitholders. The prospectus for each 
Series will describe the operation of the deferred sales charge, 
including the amount of and date of each installment payment. The 
prospectus also will contain disclosure pertaining to the trustee's 
ability to sell portfolio securities if the income generated by a 
Series' portfolio is insufficient to pay an installment. The securities 
confirmation statement sent by the Sponsor to each purchaser will state 
the amount of the ``up-front'' sales charge, if any, and the amount of 
the deferred sales charge to be deducted in regular installments. The 
annual report of each Series will state the amount of annual 
installment payments deducted during the previous fiscal year on both a 
per Trust and per Unit basis.
    8. The maximum sales charge on Units acquired in the secondary 
market normally ranges from 5.75% to 3% of the public offering price of 
the Units. The Prior Orders permit applicants to allow unitholders to 
exchange Units of one Series for Units of another Series subject to an 
additional sales charge not to exceed 2% of the public offering price 
of the acquired Units. The additional sales charge is calculated as the 
greater of (a) a flat fee, or (b) if Units of any Series are exchanged 
within five months of their acquisition for Units of a Series with a 
higher sales charge, an amount which, together with the sales charge 
already paid on the Units being exchanged, equals the normal sales 
charge on the acquired Units.
    9. Applicants seek to amend the Prior Orders to permit offers of 
exchange of Units subject to a deferred sales charge. If Units subject 
to a deferred sales charge are exchanged for Units of a Series not 
having a deferred sales charge, the deferred sales charge will be 
collected at the time of the exchange. If Units subject to a deferred 
sales charge are exchanged for Units of a Series having a deferred 
sales charge, installment payments will continue to be deducted from 
the distributions on the acquired Units until the original balance of 
the sales charge owed on the initial investment has been collected. In 
either case, the additional sales charge permitted under the Prior 
Orders will be imposed at the time of the exchange.
    10. The Sponsor offers certain Series which have short-term stated 
maturities. Upon termination of such Series, the Sponsor may create a 
new Series with the same investment objective and the same type of 
portfolio securities as the terminating Series. Applicants wish to make 
Units of the new Series available to the unitholders of the terminating 
Series at the net asset value of the new Units plus the reduced sales 
charge permitted under the Prior Orders (the ``Rollover Option''). 
Although applicants believe that the Prior Orders already permit the 
Rollover Option, they request that the Prior Orders be amended to cover 
the Rollover Option explicitly.

Applicants' Legal Analysis

    1. Under section 6(c), the SEC may exempt any person or transaction 
from any provision of the Act or any rule thereunder 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. Section 2(a)(32) defines a ``redeemable security'' as a security 
that, upon its presentation to the issuer, entitles the holder to 
receive approximately his or her proportionate share of the issuer's 
current net assets, or the cash equivalent of those assets. Because the 
imposition of deferred sales charge may cause a redeeming unitholder to 
receive an amount less than the net asset value of the redeemed Units, 
applicants seek an exemption from section 2(a)(32) so that Units 
subject to a deferred sales charge are considered redeemable securities 
for purposes of the Act.\2\
---------------------------------------------------------------------------

    \2\Without an exemption, a trust selling units subject to a 
deferred sales charge could not meet the definition of a unit 
investment trust under section 4(2) of the Act. Section 4(2) defines 
a unit investment trust as an investment company that issues only 
``redeemable securities.''
---------------------------------------------------------------------------

    3. Section 2(a)(35) defines the term ``sales load'' to be the 
difference between the sales price and the proceeds to the issuer, less 
any expenses not properly chargeable to sales or promotional expenses. 
Because a deferred sales charge is not charged at the time of purchase, 
an exemption from section 2(a)(35) is necessary.
    4. Section 22(c) and rule 22c-1 require that the price of a 
redeemable security issued by an investment company for purposes of 
sale, redemption, and repurchase be based on the investment company's 
current net asset value. Because the imposition of a deferred sales 
charge may cause a redeeming unitholder to receive an amount less than 
the net asset value of the redeemed Units, applicants seek an exemption 
from this section and rule.
    5. Section 22(d) requires an investment company and its principal 
underwriter and dealer to sell securities only at a current public 
offering price described in the investment company's prospectus. 
Because sales charges traditionally have been a component of the public 
offering price, section 22(d) historically required that all investors 
be charged the same load. Rule 22d-1 was adopted to permit sale of 
redeemable securities ``at prices that reflect scheduled variations in, 
or elimination of, the sales load.'' Because rule 22d-1 does not extend 
to scheduled variations in deferred sales charges, applicants seek 
relief from section 22(d) to permit them to waive or reduce their 
deferred sales charge in certain specified instances.
    6. Section 26(a)(2) in relevant part prohibits a trustee or 
custodian of a unit investment trust from collecting from the trust as 
an expense any payment to a depositor or principal underwriter thereof. 
Because of this prohibition, applicants need an exemption to permit the 
trustee to collect the deferred sales charge installments from 
distribution deductions or Trust assets.
    7. Applicants believe that implementation of the deferred sales 
charge program in the manner described above would be fair and in the 
interests of the unitholders of the Trusts. Thus, granting the 
requested order would be 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.
    8. Section 11(c) prohibits any offers of exchange of the securities 
of a registered unit investment trust for the securities of any other 
investment company, unless the terms of the offer have been approved by 
the SEC. Applicants assert that the reduced sales charge imposed at the 
time of exchange is a reasonable and justifiable expense to be 
allocated for the professional assistance and operational expenses 
incurred in connection with the exchange.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    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 Trust under section 22(e) and the rules and 
regulations promulgated thereunder, or (ii) a Trust 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 2% of the public offering price of the Unit 
being acquired on each exchange.
    3. The prospectus of each Trust offering exchanges 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, without notice except in 
certain limited cases.
    4. Each Series offering Units subject to a deferred sales charge 
will include in its prospectus the table required by item 2 of Form N-
1A (modified as appropriate to reflect the differences between unit 
investment trusts and open-end management investment companies) and a 
schedule setting forth the number and date of each installment payment.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-30467 Filed 12-9-94; 8:45 am]
BILLING CODE 8010-01-M