[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]
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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'').
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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.
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\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).
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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\
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\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).
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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\
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\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).
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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