[Federal Register Volume 59, Number 247 (Tuesday, December 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31660]


[[Page Unknown]]

[Federal Register: December 27, 1994]


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

SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 20785; 812-9358]

 

PaineWebber Incorporated; Temporary Order and Notice of 
Application for Permanent Order

December 19, 1994.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Temporary order and notice of application for permanent order 
of exemption under the Investment Company Act of 1940 (the ``Act'').

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

APPLICANT: PaineWebber Incorporated (``PaineWebber'').

RELEVANT ACT SECTION: Exemption from section 9(a) under section 9(c).

SUMMARY OF APPLICATION: Applicant has been granted a conditional 
temporary order, and has requested a conditional permanent order, under 
section 9(c) exempting applicant from section 9(a) to the extent 
necessary to permit applicant to employ an individual who is subject to 
a securities related injunction. The temporary order will expire on the 
earlier of ninety days from the entry of the temporary order, the date 
on which the SEC sets PaineWebber's application for permanent relief 
for a hearing, or the date on which the SEC takes final action on the 
application. The notice gives interested persons until January 12, 1995 
to request a hearing on PaineWebber's request for a permanent order.

FILING DATE: The application was filed on December 12, 1994 and amended 
on December 16, 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 
applicant 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 12, 
1995, and should be accompanied by proof of service on the applicant, 
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. Applicant, 14th Floor, 1285 Avenue of the Americas, New York, 
New York 10019.

FOR FURTHER INFORMATION CONTACT: Mary Kay Frech, Senior Attorney, at 
(202) 942-0579, or 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 may be obtained for a fee from 
the SEC's Public Reference Branch.

Applicant's Representations

    1. PaineWebber, a Delaware corporation, is a registered broker-
dealer and registered investment adviser. PaineWebber is a wholly owned 
subsidiary of Paine Webber Group Inc. (``PWG''). PaineWebber serves as 
the investment adviser and principal underwriter of registered 
investment companies and proposes to act as investment adviser and 
principal underwriter to additional investment companies in the future. 
A wholly owned subsidiary of PaineWebber, Mitchell Hutchins Asset 
Management Inc. (``Mitchell Hutchins'') serves as sub-advisor and sub-
administrator to the registered investment companies underwritten and 
advised by PaineWebber. In addition, Mitchell Hutchins is the 
investment adviser and principal underwriter for a number of open-end 
and closed-end registered investment companies, and anticipates serving 
in similar capacities with regard to additional registered investment 
companies in the future. PaineWebber is also the sole depositor, or a 
co-depositor, and/or underwriter of numerous unit investment trusts.
    2. General Electric Company (``GE''), the parent company of Kidder, 
Peabody & Co. Incorporated (``Kidder''), and Kidder have entered into 
an asset purchase agreement, dated October 17, 1994, with PWG. The 
asset purchase agreement provides for the purchase by PWG and certain 
of its subsidiaries of certain assets of Kidder and its subsidiaries, 
and contemplates the employment by PaineWebber of Kidder employees.
    3. PaineWebber currently is not disqualified from acting in any of 
the capacities specified in section 9(a) of the Act.\1\ Subject to 
receiving the requested exemption, however, PaineWebber proposes to 
employ Stanley S. Trotman, Jr. (``Mr. Trotman'') in the health sciences 
group within its investment banking department. Mr. Trotman is subject 
to a securities related injunction. Absent relief, Mr. Trotman's 
employment would cause PaineWebber to become disqualified under section 
9(a) of the Act from acting in any of the capacities specified in that 
section. Accordingly, PaineWebber seeks the requested relief so that 
applicant, and any affiliated person of applicant, will not be 
disqualified from acting in any of the capacities specified in section 
9(a) by reason of employing Mr. Trotman.
---------------------------------------------------------------------------

    \1\In 1990, the Commission exempted PaineWebber from the 
disqualification provisions of section 9(a) with respect to issues 
unrelated to this application. PaineWebber Incorporated, Investment 
Company Act Release Nos. 17588 (July 16, 1990) (Notice) and 17789 
(Oct. 10, 1990) (order).
---------------------------------------------------------------------------

    4. Mr. Trotman currently co-heads the health care group within the 
investment banking department of Kidder. Prior to holding this 
position, Mr. Trotman was a director of Charter Medical Corporation, T2 
Medical, Inc., and Salick, Healthcare, Inc. Until February 16, 1990, 
when Drexel Burnham Lambert Group, the parent of Drexel Burnham 
Lambert, Incorporated (``Drexel''), filed for bankruptcy protection, 
Mr. Trotman was a managing director of Drexel in charge of the health 
care group in its corporate finance department.
    5. On or about December 19, 1985, Drexel and Mr. Trotman consented 
to the entry of a final judgment and order of permanent injunction (the 
``Injunction'') in an action commenced by the SEC. Civil Action No. 85-
9855 (United States District Court for the Southern District of New 
York). The activities forming the basis for the Injunction took place 
from approximately November 1981 to June 14, 1982, during which time 
Drexel acted as co-lead manager for two public offerings of securities 
issued by Flight Transportation Corporation (``Flight''). The SEC's 
complaint alleged that Drexel and Mr. Trotman violated sections 17(a) 
(2) and (3) of the Securities Act of 1933 in connection with Drexel's 
due diligence investigation for the underwriting of approximately $25.6 
million of securities issued by Flight in June 1982. The complaint 
alleged that the registration statement Flight filed with the SEC for 
these securities contained materially false and misleading statements 
relating to the group charter business, including among other things, 
the statement that Flight's $23 million group charter business 
comprised approximately one-third of Flight's revenues, when, in fact, 
the group charter business did not and never had existed. The complaint 
alleged that Drexel and Mr. Trotman placed undue reliance on the 
statements of Flight's management and failed to verify independently 
the existence of Flight's group charger business by not contacting the 
customers or suppliers of the group charter business. The terms of the 
Injunction required Mr. Trotman to submit his due diligence work for 
review by Drexel's underwriting assistance committee for a period of 
four months and for Drexel to submit its written due diligence 
procedures for review by outside counsel for an opinion as to the 
adequacy of the procedures.
    6. On December 20, 1985, the SEC issued a temporary order under 
section 9(c) of the Act which exempted Drexel from section 9(a) with 
respect to the Injunction. On February 24, 1986, the SEC granted Drexel 
a permanent order under section 9(c) of the Act.\2\
---------------------------------------------------------------------------

    \2\Drexel Burnham Lambert Incorporated, Investment Company Act 
Release Nos. 14862 (Dec. 20, 1985) (notice and temporary order) and 
14954 (Feb. 24, 1986) (permanent order).
---------------------------------------------------------------------------

    7. In 1990, Kidder proposed to hire Mr. Trotman as co-head of its 
health care group. On May 24, 1990, the SEC issued a temporary order 
under section 9(c) granting Kidder relief from the prohibitions of 
section 9(a) resulting from the Injunction. On June 20, 1990, the SEC 
granted Kidder a permanent order under section 9(c).\3\
---------------------------------------------------------------------------

    \3\Kidder, Peabody & Company, Inc., Investment Company Act 
Release Nos. 17509 (May 24, 1990) (notice and temporary order) and 
17545 (June 20, 1990) (permanent order).
---------------------------------------------------------------------------

    8. In the capacity of his employment with PaineWebber, Mr. Trotman 
would be expected to advise and assist PaineWebber's corporate clients 
with their corporate financing, acquisition, and disposition needs. 
Together with a team of investment banking specialists, Mr. Trotman 
would solicit investment banking clients, perform due diligence 
investments of corporation in connection with proposed underwritings, 
acquisitions, or dispositions, work with counsel to prepare 
underwriting documents, solicit prospective investors in connection 
with securities offerings, and structure, price, and otherwise 
negotiate the terms of securities offerings.
    9. PaineWebber requests: (a) a temporary order exempting it from 
the provisions of section 9(a) for a period of up to 90 days following 
the date of the order to relieve it from any ineligibility under 
section 9(a) by reason of the employment by applicant of Mr. Trotman; 
and (b) a permanent order granting the request relief.

Applicant's Legal Analysis

    1. Section 9(a)(2) of the Act, in pertinent part, disqualifies any 
person from acting in the capacity of employee, officer, director, 
member of an advisory board, investment adviser, or depositor for any 
registered investment company, or principal underwriter for any 
registered open-end company, registered unit investment trust, or 
registered face-amount certificate company, if such person is, by 
reason of any misconduct, permanently or temporarily enjoined from 
acting as an underwriter, broker, dealer, or investment adviser, or 
from engaging in or continuing any conduct or practice in connection 
with any such activity or in connection with the purchase or sale of 
any security. A company with an employee or other affiliated person 
ineligible to serve in any of these capacities under section 9(a)(2) is 
similarly ineligible by reason of section 9(a)(3).
    2. Section 9(c) of the Act provides that, upon application, the SEC 
shall grant an exemption from the disqualification provisions of 
section 9(a), either unconditionally or on an appropriate temporary or 
other conditional basis, if it is established that the prohibitions of 
section 9(a), as applied to the applicant, are unduly or 
disproportionately severe or that the conduct of such person has been 
such as not to make it against the public interest or protection of 
investors to grant such application.
    3. In support of its position that the SEC should grant the 
requested exemptions from the prohibitions of section 9(a), PaineWebber 
asserts that:
    (a) Neither PaineWebber nor any affiliated person of PaineWebber 
was the subject of the Injunction, and the facts and circumstances to 
which the Injunction relate do not involve any activities of 
PaineWebber or its affiliates.
    (b) None of the PaineWebber investment companies were in any way 
involved in any of the circumstances referred to in the Injunction.
    (c) As an employee in PaineWebber's investment banking department, 
Mr. Trotman will have no involvement with, or responsibilities for, the 
PaineWebber investment companies.
    (d) The allegations in the Commission's complaint against Mr. 
Trotman and the terms of the Injunction and the circumstances to which 
they relate in no way involve any activities of an investment company. 
During Mr. Trotman's tenure with Kidder and Drexel, he was not involved 
with the activities of any of Kidder's or Drexel's investment 
companies.
    (e) Since the entry of the Injunction, Mr. Trotman has not been 
subject to any similar actions, or sanctioned in any way by the SEC, 
any self-regulatory organization, or any state securities commission, 
nor are there any customer complaints, lawsuits, or regulatory actions 
pending against Mr. Trotman.
    (f) The prohibitions of section 9(a) deprive Mr. Trotman of the 
opportunity to serve as an employee of any company, such as 
PaineWebber, that serves as an investment adviser, principle 
underwriter, or depositor of investment companies, in circumstances in 
which he would have no involvement in investment company operations.
    (g) The prohibitions of section 9(a) would be unduly and 
disproportionately severe as applied to applicant because they would 
deprive PaineWebber of Mr. Trotman's services in an area totally 
unrelated to the activities of an investment company.
    (h) Because the Commission has previously considered and granted, 
to both Drexel and Kidder, temporary and permanent exemptions from the 
provisions of section 9(a) operative as a result of the Injunction, it 
is 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 that the temporary exemption be granted.
    (i) The temporary exemption is appropriate as it would: (i) permit 
Mr. Trotman to commence his employment with PaineWebber and thus avoid 
loss of income which could occur if he were forced to forego this 
employment pending the final disposition of the application; (ii) 
permit PaineWebber to provide investment banking services to former 
clients of Kidder that wish to continue to utilize Mr. Trotman's 
services as an employee of PaineWebber; (iii) provide continuity of 
services for such clients; and (iv) allow PaineWebber to provide 
continuity of service to its investment company clients.
    4. In making the application, PaineWebber acknowledges, 
understands, and agrees that the application and any exemption issued 
by the SEC to applicant shall be without prejudice to, and shall not 
limit, the SEC's rights in any manner with respect to any SEC 
investigation or enforcement action under the federal securities laws, 
or the consideration by the SEC of any application for exemption from 
statutory requirements, including, without limitation, the 
consideration of the instant application for a permanent exemption 
pursuant to section 9(c) from the provisions of section 9(a) of the Act 
or the revocation or removal of any exemption granted in connection 
with the application.

Applicant's Condition

    As a condition of the requested relief, neither PaineWebber, nor 
any affiliated person of PaineWebber relying upon relief granted 
pursuant to the application, will employ Mr. Trotman in any capacity 
related directly to the provision of investment advisory services to, 
or acting as a depositor for, any registered investment company or to 
acting as a principal underwriter for any registered open-end 
investment company, unit investment trust or registered face amount 
certificate company without first making further application to the 
SEC.

Temporary Order

    The Division of Investment Management, pursuant to delegated 
authority, has considered the matter and finds that, under the 
standards of section 9(c) of the Act applicable to this matter, 
applicant has made the showing necessary to justify granting a 
temporary exemption. Accordingly,
    It is ordered, under section 9(c) of the Act, that applicant is 
hereby temporarily exempted from the provisions of section 9(a) of the 
Act, for a period to expire on the earlier of ninety days from the 
entry of the temporary order, the date on which the SEC sets 
PaineWebber's application for permanent relief for a hearing, or the 
date on which the SEC takes final action on the application for an 
order granting applicant a permanent exemption from the provisions of 
section 9(a).

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-31660 Filed 12-23-94; 8:45 am]
BILLING CODE 8010-01-M