[Federal Register Volume 60, Number 144 (Thursday, July 27, 1995)]
[Notices]
[Pages 38598-38601]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18473]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21222; 812-7895]


Applications, Hearings, Determinations, etc.: Morgan Stanley & 
Co., Inc. et al.

July 21, 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: Morgan Stanley & Co. Incorporated (``Morgan Stanley''), 
Technology Equity and Income Trust (the ``Trust''), and any future 
closed-end investment company underwritten by Morgan Stanley (together 
with the Trust, the ``Trusts'') that invests in Listed Securities (as 
defined below), is structured in a manner identical in all material 
respects to the Trust, and is authorized to write call options on its 
portfolio of securities.

RELEVANT ACT SECTIONS: Order requested under sections 6(c) and 17(b) 
granting an exemption from section 17(a)(2).

SUMMARY OF APPLICATION: Applicants seek an order to permit Morgan 
Stanley, the principal underwriter for the Trusts, and other principal 
underwriters of the Trusts, to purchase call options on securities held 
by the Trusts.

FILING DATES: The application was filed on March 30, 1992, and amend on 
June 30, 1992, September 28, 1992, February 9, 1993, August 23, 1994, 
and March 7, 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 August 15, 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 who wish to be 
notified of a hearing may request notification by writing to the SEC's 
Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549. 
Applicants: Technology Equity and Income Trust, c/o The Bank of New 
York, 101 Barclay Street, 21st Floor West, New York, New York 10286; 
Morgan Stanley & Co. Incorporated, 1251 Avenue of the Americas, New 
York, New York 10020.

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 may be obtained for a fee at the 
SEC's Public Reference Branch.

Applicants' Representations

    1. The Trusts will be registered, non-diversified, closed-end 
management investment companies. The Trusts will hold a portfolio of 
securities subject to call options and stripped U.S. Treasury 
securities (``Treasury Securities''). The portfolio securities must be 
registered under section 12 of the Securities Exchange Act of 1934, and 
listed on the New York Stock Exchange, the American Stock Exchange 
(other than Emerging Company Marketplace securities (``ECM 
Securities'')), or traded on the NASDAQ-National Market System 
(provided the NASDAQ-NMS securities satisfy the listing requirements of 
the New York Stock Exchange or the American Stock Exchange (other than 
the listing requirements applicable to ECM Securities)) (Collectively, 
the ``Listed Securities''). Interests in the Trusts will be called STEP 
Units. The Trusts' objectives will be to provide current quarterly cash 
distributions from the proceeds of the Treasury Securities and regular 
cash dividends on the Listed Securities, and the potential for capital 
appreciation up to a disclosed maximum on the Listed Securities. The 
final composition of a Trust's portfolio will be determined at the 
close of trading on the way prior to the commencement of the offering 
of STEP Units (the ``Determination Date''). The Trusts will acquire 
their portfolios in the manner described below.
    2. Each Trust will invest in Listed Securities using the gross 
proceeds received from the sale of its STEP Units to the underwriters. 
The trustees of each Trust (the ``Trustees''), with the advice of an 
investment adviser (the ``Investment Adviser''), will select the 
specific Listed Securities for the respective Trust at least one 
business day prior to the Determination Date. At the opening of the 
market on the Determination Date, the Trustees will enter market buy 
orders to purchase the Listed Securities with unaffiliated brokers or 
dealers selected by the Trustees with the advice of the Trust's 
Investment Adviser.
    3. Immediately after the purchase of the Listed Securities, the 
Trusts will sell a single call option on each issue of Listed 
Securities (each option is referred to as a ``Contract''). Each Trust 
will invest the net proceeds from the sale of the Contracts in Treasury 
Securities which will mature on a quarterly basis over the life of the 
Trust. Unitholders will receive quarterly distributions which consist 
of the proceeds received from the Treasury Securities as they mature 
and regular cash dividends on the Listed Securities. The expenses of a 
Trust, including any underwriting commissions on the sale of STEP 
Units, will be deducted from the proceeds from the sale of its 
Contracts.
    4. Each Contract will grant the Contract holder the right to 
purchase the Listed Securities underlying the Contract at a fixed price 
(the ``Exercise Price'') on a fixed date (the ``Expiration Date''). The 
Exercise Price for each Contract will range between 30% and 50% in 
excess of the current market price of the Listed Securities on the 
Determination Date. The Expiration Date will be no more than 3\1/2\ 
years after issuance.
    5. The Contracts also will provide that the Exercise Price for each 
Listed Security be reduced dollar-for-dollar by the per share amount of 
(a) any Extraordinary Cash Dividend \1\ and (b) 

[[Page 38599]]
any non-cash dividend or non-cash distribution on a Listed Security 
that is taxable to security holders under federal income tax laws 
valued as of the record date for the dividend or distribution. If on or 
prior to the Expiration Date the Exercise Price for a Listed Security 
has been reduced to zero or below, the Contract holder shall be deemed 
to have exercised its purchase rights under the Contract on that date. 
The Trust will deliver to the Contract holder the Listed Security and 
any Extraordinary Cash Dividend or non-cash dividend that caused the 
Exercise Price to fall below zero.

    \1\ An ``Extraordinary Cash Dividend'' will be defined, with 
respect to any Listed Security, as a dividend which exceeds the 
immediately preceding non-Extraordinary Cash Dividend on the Listed 
Security by an amount equal to at least 10% of the closing sale 
price of the Listed Security on the business day preceding the ex-
dividend date for the current dividend.
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    6. If on or prior to the Expiration Date, (a) a merger or 
consolidation of a Listed Security's issuer is consummated and the 
issuer is not the surviving party, or (b) a successful tender or 
exchange offer is made for at least a majority interest in the issuer 
of a Listed Security, the Contract holder for that Listed Security will 
have the right for five business days, beginning on the date of 
consummation of the merger or consolidation or the date the Security is 
accepted for payment under the tender or exchange offer, to accelerate 
its purchase rights under the Contract. After this period, the rights 
of the Contract holder will expire.
    7. The Contracts will be sold to major broker/dealers and/or 
financial institutions (which may include Morgan Stanley or other 
principal underwriters of the Trusts) through a bidding procedure 
described in detail Conditions 1 and 2 below. Because all the terms of 
the Contracts will be set (i.e., Expiration Date, Exercise Price (as a 
percentage of the then-current price of the underlying Listed 
Security), termination provisions, adjustments for extraordinary 
events, etc.), bidding on a Contract will consist solely of the 
submission of a bid price expressed as a percentage of the then-current 
price of the underlying security. Each bidder will be permitted to bid 
for all of the Contracts on an aggregate basis and/or submit a separate 
bid on each. Subject to certain conditions described below, the 
Trustees will sell the Contracts in the manner best calculated to 
maximize the net proceeds to the Trust.
    8. The administration and operation of the Trusts will be overseen 
by three Trustees, none of whom are interested persons as defined in 
section 2(a)(19) of the Act. A bank having the qualifications described 
in section 26(a) of the Act will perform the daily administration of 
the Trusts (the ``Administrator''). In addition, the Administrator will 
act as the Trusts' custodian, paying agent, registrar, and transfer 
agent. The Administrator will not be a principal underwriter or 
affiliated person of the Trusts, or an affiliated person of a principal 
underwriter or affiliated person.
    9. The Investment Adviser for each Trust will be unaffiliated with 
Morgan Stanley and any other principal underwriter of the Trust, will 
be an established entity, registered as an investment adviser under the 
Investment Advisers Act of 1940 and will have significant assets under 
its management. The Investment Adviser will advise the Trustees in 
connection with the composition and acquisition of the initial 
portfolio of the Trusts, and thereafter, the Trustees may consult with 
the Investment Adviser concerning the disposal of the Listed Securities 
in the instances described below where the Trustees have the discretion 
to dispose of them.
    10. The Trusts will terminate on or shortly after the Expiration 
Date. Each Trust's prospectus will specify that the Trust intends to 
hold each Listed Security and any distributions thereon until the 
Expiration Date. However, each Trust will be required to distribute 
cash or dispose of any securities it receives and distribute the 
proceeds to unitholders if (a) an issuer of a Listed Security pays a 
non-cash dividend or makes a non-cash distribution that is taxable to 
its security holders under federal income tax laws, (b) an issuer of a 
Listed Security is acquired, whether in a cash merger or a merger 
involving the distribution of securities, or is a party to a 
consolidation where it is not the surviving party, (c) there is a 
tender or exchange offer for at least a majority interest in an issuer 
of a Listed Security; however, if the offer is unsuccessful, the Trust 
will withdraw the Listed Securities it has previously tendered, and if 
only a portion of the Trust's shares are purchased, the Trust will be 
required to sell the balance of its shares in the market, or (d) an 
issuer of a Listed Security declares a cash dividend or makes a cash 
distribution. In addition, any time security holders may elect cash 
consideration, the Trust will be required to elect to receive cash and 
distribute it to unitholders. Each Trust will retain any securities or 
property obtained in a stock split, reverse stock split, or tax-free 
non-cash dividend or distribution declared or made by any issuer of a 
Listed Security. Any retained securities or property will, together 
with the related Listed Security, be subject to purchase by the holder 
of the Contract related to that Listed Security.
    11. The Trustees may dispose of a Listed Security and distribute 
the proceeds to unitholders if (a) the Listed Security's market price 
falls to less than 50% of its market price on the Determination Date, 
or (b) the issuer of the Listed Security becomes bankrupt, insolvent, 
or defaults on amounts due on its outstanding securities. In these 
instances, the Contract holders will have agreed to negotiate in good 
faith with the Trustees the early termination of the Contracts. Except 
under the above circumstances, the Contract holders will not have an 
opportunity to seek to negotiate an early termination of the Contracts.

Applicants' Legal Analysis

    1. Applicants request an order under sections 6(c) and 17(b) 
exempting them from section 17(a)(2) of the Act to permit Morgan 
Stanley and other principal underwriters of the Trusts to purchase the 
Contracts. Section 17(a)(2) of the Act, in part, prohibits an 
affiliated person of or a principal underwriter for a registered 
investment company, acting as principal, from purchasing any security 
or other property from the registered company (except securities of 
which the seller is the issuer). Since the sale of an option may be 
viewed as a sale of the underlying security, section 17(a)(2) prohibits 
the Trusts' principal underwriters from purchasing the Contracts. 
Section 17(b) of the Act provides, however, that the Commission may 
exempt a transaction from the provisions of section 17(a) if evidence 
establishes that the terms of the proposed transaction, including the 
consideration to be paid or received, are reasonable and fair and do 
not involve overreaching on the part of any person concerned, and that 
the proposed transaction is consistent with the policy of the 
registered investment company concerned and with the general purposes 
of the Act. Section 6(c) provides that the Commission may conditionally 
or unconditionally exempt any person, security or transaction, or any 
class or classes of persons, securities or transactions, from any 
provision of the Act or any rule or regulation thereunder, 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.
    2. The market for the Contracts is the over-the-counter options 
market. Morgan Stanley believes that it is one of only a small number 
of firms that are 

[[Page 38600]]
active and frequent participants within the U.S. over-the-counter 
market segment that would include the Contracts. Applicants believe 
that to preclude Morgan Stanley and other principal underwriters of a 
Trust from bidding for the Contracts may prevent a Trust from receiving 
the best price because it would exclude the bid of entities who might 
pay a price somewhat higher than the market price since they had the 
most to gain from the successful marketing of the Trust, and because 
there would be a perceived lack of competition if independent bidders 
are aware that major participants in the over-the-counter options 
market are excluded from bidding. Applicants assert that the 
competitive bidding process has a direct affect on the quarterly 
distributions to unitholders since the amount of Treasury Securities 
purchased will depend upon the amount of the proceeds received from the 
sale of the Contracts. Accordingly, applicants submit that providing 
the Trusts with access to all major dealers is in the best interests of 
the Trusts, its holders, and is consistent with the general purposes of 
the Act.
    3. Applicants believe that Morgan Stanley's dual role as 
underwriter and bidder for the Contracts would not give it an advantage 
in structuring the Contracts or assessing their value. The participants 
in the over-the-counter options market are various sophisticated, 
established, well-capitalized financial institutions including major 
investment banking firms, money center banks, insurance companies, and 
their affiliates. These sophisticated institutions employ almost 
identical valuation models and technology to price options. Prospective 
bidders will have a copy of a Trust's prospectus and draft of the 
Contract at least two business days prior to the day the final bids are 
due. Although the Contracts will not be typical over-the-counter 
options, they are not of such a customized nature to make it unlikely 
for other broker/dealers or financial institutions to submit bids. The 
Contract's form will be similar to other types of call options used in 
privately negotiated transactions. Since all of the Contracts' terms 
have been set, other than price, the bidding procedure has been made as 
simple as possible. Accordingly, the notice period and information 
provided in the bidding process are sufficient to ensure competitive, 
bona fide bids.
    4. Applicants assert that the bidding procedures to be followed by 
Morgan Stanley or any other principal underwriter in purchasing the 
Contracts, as set forth in Applicants' Conditions below, will be 
consistent with the standards of sections 17(b) and 6(c). These 
procedures ensure that the Trusts receive the best price and execution 
on the sale of the Contracts and ensure against any overreaching on the 
part of any party concerned.
    5. Lastly, each prospectus will fully disclose that the Contracts 
will be offered by competitive bid and that Morgan Stanley, and to the 
extent applicable, any other underwriter, will be among the bidders.

Applicants' Conditions

    Applicants agree to the following as conditions to the requested 
order:
    1. The Trustees will select prospective bidders on the basis of 
such factors as having the necessary capital to purchase Contracts, 
having the ability to appropriately price the Contracts and being a 
major participant in the over-the-counter options market. The Contracts 
will be offered by competitive bid to not less than four major broker-
dealers and/or financial institutions who are in the business of making 
bids on over-the-counter options, at least three of whom are not 
affiliated persons or principal underwriters of a Trust or affiliated 
persons or a principal underwriter or affiliated person. At least two 
business days prior to the date and time that final bids are due, the 
Trustees will contact prospective bidders, indicate when bidding for 
the Contracts will commence and invite them to bid. The Trustees will 
supply prospective bidders with a draft invitation to bid summarizing 
the terms of the Contract, a copy of the Trust's prospectus and a draft 
of the Contract. On the business day before final binding bids are due, 
the Trustees will send a formal notice to prospective bidders. The 
notice will indicate where and at what time final binding bids are due. 
No bidder, including Morgan Stanley, will have access to any bids until 
after the Contracts are awarded. Subject to condition 2 below, the 
Trustees will sell the Contracts in the manner best calculated to 
maximize net proceeds to the Trust (e.g., on an aggregate or individual 
basis).
    2. No sale of Contracts by a Trust will be made to Morgan Stanley 
or another principal underwriter unless (a) if Morgan Stanley or 
another principal underwriter submits separate bids on individual 
Contracts, the Trustees receive and document for each Contract bid for 
by Morgan Stanley or the other principal underwriter at least two bona 
fide bids from major broker dealers and/or financial institutions who 
are not affiliated persons or principal underwriters of the Trust or 
affiliated persons of a principal underwriter or affiliated person, and 
(b) if Morgan Stanley or another principal underwriter submits bids for 
all of the Contracts on an aggregate basis, the Trustees receive and 
document for all Contracts in the aggregate at least two bona fid bids 
from major broker dealers and/or financial institutions who are not 
affiliated persons or principal underwriters of the Trust or affiliated 
persons of a principal underwriter or affiliated person, and the 
Trustees determine that either the bid price on an individual Contract 
or the aggregate bid price, as the case may be, offered by Morgan 
Stanley or any other underwriter will maximize net proceeds to the 
Trust. In the event of a tie, the bidders would be permitted to submit 
one last bid. If there were still a tie following submission of the 
last bid, the Contracts in question would not be sold to Morgan Stanley 
or any other principal underwriter.
    3. The Administrator, under the supervision of the Trustees, will 
maintain sufficient records to verify compliance with the conditions of 
the order. Such records will include the following: (a) The basis upon 
which the Trustees selected prospective bidders; (b) all bidders 
contacted; (c) all bidders to whom a bidding form was sent; (d) all 
bids received; (e) the bidder who was awarded the Contracts; (f) the 
winning bid prices; and (g) whether the bidders were principal 
underwriters of the Trust, affiliated persons of the Trust, or 
affiliated persons of a principal underwriters or affiliated person. 
All records will be maintained and preserved in the same manner as 
records required under Rule 31a-1(b)(1) of the Act.
    4. Morgan Stanley's legal department, and the legal departments of 
any parties relying on this order, will prepare guidelines for 
personnel to make certain that transactions conducted pursuant to the 
order comply with the conditions set forth in the order and that the 
parties generally maintain arm's length relationships.
    5. The underwriting allocations will be determined at least one 
business day prior to the day the Trustees invite financial 
institutions to bid and will not in any way be based on participation 
in the bidding process.
    6. Morgan Stanley, or any party relying on this order, will not 
have any involvement with respect to the Trustees' selection of 
prospective bidders or the bids accepted by the Trustees and will not 
attempt to influence or control in any way the sale of the Contracts to 
principal 

[[Page 38601]]
underwriters aside from placing its own bid for the Contracts.
    7. The Trustees of each Trust, including a majority of 
noninterested Trustees, have or will have approved the Trust's 
participation in transactions conducted pursuant to the exemption and 
have or will have determined that such participation by the Trust is in 
the best interests of the Trust and its unitholders. The minutes of the 
meeting of the Board of Trustees at which this approval was or will be 
given reflect or will reflect in detail the reasons for the Trustee's 
determination.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-18473 Filed 7-26-95; 8:45 am]
BILLING CODE 8010-01-M