[Federal Register Volume 60, Number 229 (Wednesday, November 29, 1995)]
[Proposed Rules]
[Pages 61454-61463]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29109]




[[Page 61453]]

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Part VIII





Securities and Exchange Commission





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17 CFR Parts 230, 239, and 270



Calculation of Yield by Certain Unit Investment Trusts; Proposed Rule

  Federal Register / Vol. 60, No. 229 / Wednesday, November 29, 1995 / 
Proposed Rules   

[[Page 61454]]


SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 239, and 270

[Release Nos. 33-7243; IC-21538; File No. S7-32-95]
RIN 3235-AG63


Calculation of Yield by Certain Unit Investment Trusts

AGENCY: Securities and Exchange Commission.

ACTION: Proposed amendments to rules and forms.

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SUMMARY: The Commission is proposing for public comment rule and form 
amendments that would require certain unit investment trusts (``UITs'' 
or ``trusts'') to use a uniform formula to calculate yields quoted in 
their prospectuses, advertisements, and sales literature. Use of the 
uniform formula by UITs is designed to permit investors to assess more 
accurately the anticipated yield from a UIT and to make comparisons of 
yields among UITs.

DATES: Comments on the proposed amendments should be received on or 
before January 29, 1996.

ADDRESSES: Three copies of all comments should be submitted to Jonathan 
G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth 
Street NW., Washington, D.C. 20549. All comment letters should refer to 
File No. S7-32-95. All comments received will be available for public 
inspection and copying in the Commission's Public Reference Room, 450 
Fifth Street NW., Washington D.C. 20549.

FOR FURTHER INFORMATION CONTACT: Anthony R. Bosch, Senior Attorney, or 
Joseph E. Price, Deputy Chief, (202) 942-0721, Office of Disclosure and 
Investment Adviser Regulation, Division of Investment Management, 
Securities and Exchange Commission, 450 Fifth Street NW., Washington, 
D.C. 20549.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``Commission'') today is proposing for comment:
    (1) Amendments to Form S-6 [17 CFR 239.16] under the Securities Act 
of 1933 [15 U.S.C. 77a et seq.] (the ``1933 Act''), the form used by 
UITs to register securities under the 1933 Act, that would standardize 
the computation of yield by certain UITs in their prospectuses;
    (2) Amendments to rule 482 [17 CFR 230.482] under the 1933 Act, 
together with the amendments to Form S-6, that would require certain 
UITs including quotations of return in their advertisements also to 
include a quotation of yield calculated in accordance with the formula 
in Form S-6; and
    (3) Amendments to rule 34b-1 [17 CFR 270.34b-1] under the 
Investment Company Act of 1940 [15 U.S.C. 80a-1 et seq.] (``1940 Act'') 
that would require certain UITs including quotations of return in their 
sales literature also to include a quotation of yield calculated in 
accordance with the formula in Form S-6.

Executive Summary

    The Commission is proposing to adopt a uniform formula, called the 
``Estimated Yield Formula,'' for the calculation of the anticipated 
yield of UITs that invest substantially all of their assets in fixed 
income securities (``Fixed Income UITs''). Under the proposed rule and 
form amendments, a Fixed Income UIT would be required to include in its 
prospectus a yield quotation calculated pursuant to the Estimated Yield 
Formula (``Estimated Yield''). A Fixed Income UIT that includes a 
quotation of yield, or other similar quotation purporting to 
demonstrate the income to be earned or distributions to be made by the 
UIT, in its advertisements and sales literature would be required to 
include and give equal prominence to its Estimated Yield. The proposed 
amendments are intended to establish a uniform standard for calculating 
UIT yield to enhance the ability of prospective investors to make 
informed investment decisions.

Table of Contents

I. Background
II. Discussion
    A. Proposed Estimated Yield Formula
    1. Sales Load
    2. Compounding
    3. Accrued Interest
    4. Principal Account Cash Balances
    5. Market Discount on Tax Exempt Securities
    6. Preferred Stock, Asset-Backed Securities, and Adjustable-Rate 
Securities
    7. Units of Other Trusts
    8. Tax Equivalent Yield
    B. Scope of Application of the Proposed Estimated Yield Formula
    1. Prospectuses
    2. Advertisements and Sales Literature
    3. Secondary Market Sales
    C. Alternative Formula
III. General Request for Comments
IV. Cost/Benefit Analysis
V. Summary of Initial Regulatory Flexibility Act Analysis
VI. Paperwork Reduction Act
VII. Text of Proposed Rule and Form Amendments

I. Background

    A UIT is a type of investment company that issues securities, 
typically called ``units,'' representing undivided interests in a 
relatively fixed portfolio of securities.1 UITs are typically 
sponsored by broker-dealers, which assemble the UIT's portfolio 
securities, deposit the securities in a trust, and sell units of the 
UIT in a public offering. Unlike a mutual fund, a UIT does not have a 
board of directors or an investment adviser and its portfolio is not 
actively managed.

    \1\Section 4(2) of the 1940 Act [15 U.S.C. 80a-4(2)] defines a 
UIT as an investment company which (A) is organized under a trust 
indenture, contract of custodianship or agency, or similar 
instrument, (B) does not have a board of directors, and (C) issues 
only redeemable securities, each of which represents an undivided 
interest in a unit of specified securities. See generally Harman, 
Emerging Alternatives to Mutual Funds: Unit Investment Trusts and 
Other Fixed Portfolio Investment Vehicles, 1987 Duke L.J. 1045 
(1987).
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    UIT units are redeemable securities that entitle an investor to 
receive his or her proportionate share of the UIT's net assets upon 
redemption. Notwithstanding this characteristic of UIT units, most UIT 
sponsors voluntarily maintain a secondary market for units of the UITs 
they sponsor.2 This secondary market reduces the frequency with 
which trusts are forced to liquidate as a result of unitholder 
redemptions.

    \2\Sponsors that maintain secondary markets in the shares of the 
UITs they sponsor are considered issuers under section 2(4) of the 
1933 Act [15 U.S.C. 77b(4)] and must comply with the registration 
requirements of the 1933 Act for units they offer to the public. In 
addition, under section 24(d) of the 1940 Act [15 U.S.C. 80a-24(d)], 
a broker-dealer selling UIT shares in the secondary market must 
comply with section 5(b) of the 1933 Act [15 U.S.C. 77e(b)] if the 
sponsor is continuing to sell shares in the trust.
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    UITs currently have approximately $74 billion in aggregate assets, 
most of which (88 percent) are held by Fixed Income UITs.3 In 
marketing Fixed Income UITs to investors, sponsors and broker-dealers 
typically quote a rate of return that estimates the income that an 
investor who holds a unit for the expected life of the UIT can 
anticipate receiving. This method of marketing Fixed Income UITs is 
similar to the manner in which individual bonds are marketed to 
investors based on a bond's ``yield to maturity,''4 and may be 
contrasted to mutual fund performance marketing, which is based 
exclusively on the past performance of the mutual fund.5 The 
prominence of the 

[[Page 61455]]
anticipated income rate to the investment decisions of UIT investors 
makes it particularly important that the rate is uniformly and 
accurately calculated.

    \3\Source: Investment Company Institute. Tax-free debt 
securities represent approximately $57 billion (89 percent) of the 
securities held by Fixed Income UITs. Id.
    \4\Yield to maturity is the discount rate that equates the 
present value of future promised cash flows from the security to the 
current market price of the security. See W. Sharpe, Investments, 
1028 (5th ed. 1995).
    \5\See Item 22(b) of Form N-1A under the 1940 Act [17 CFR 
274.11A], which specifies the manner in which mutual funds calculate 
yield and total return. Investment Company Act Rel. No. 16245 (Feb. 
2, 1988) [53 FR 3868 (Feb. 10, 1988)] (adopting amendments to rule 
482 and other rules to standardize the calculation of mutual fund 
performance).
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    Before 1989, estimated current return (``ECR'') was the performance 
measurement used by Fixed Income UITs. The ECR of a trust is calculated 
by dividing the trust's annual interest income per unit (net of 
expenses) by the offering price per unit.6 While a trust's ECR is 
a reasonably accurate measure of anticipated cash flows from a unit, it 
does not take into account the full effect of bonds in a trust's 
portfolio that are trading at a market discount or premium in the same 
manner as the yield to maturity of a bond. As a result, the ECR of a 
Fixed Income UIT comprised of premium bonds may overstate the return 
that may be reasonably anticipated over the life of the trust.7

    \6\ECR is analogous to ``current yield,'' a method of quoting 
yield on an individual bond based on the amount of annual income an 
investor will earn if the bond is purchased today, as a percentage 
of today's price. See W. Sharpe supra note 4 at 1006.
    \7\For example, a Fixed Income UIT consisting of bonds that, at 
the time of deposit, were trading at 10% premium to their par value, 
paying a 5% interest coupon every six months, and maturing in ten 
years, would have an ECR of 9.09% (assuming no sales load or 
expenses). If, however, a unitholder holds the units until maturity, 
the unitholder's return would be 8.5%. The lower rate reflects that 
the 10% premium would not be recovered by the unitholder when the 
UIT matures.
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    ECR was developed at a time when interest rates were fairly stable 
and UIT sponsors bought and deposited bonds at par. In the 1970s, 
interest rates became more volatile,8 and in the 1980s the 
practices of some UIT sponsors began to change. In 1989, the 
Commission's staff became aware that some UITs proposed to invest a 
significant portion of their assets in premium bonds.9 In response 
to concerns expressed by the staff that the quotation of ECR by such 
trusts could mislead prospective investors, the UIT industry developed 
a formula, the estimated long-term return (``ELTR'') formula,10 as 
a solution to ECR's limitations.11 ELTR is calculated by averaging 
the yields to maturity of the bonds held by a UIT, giving weight to the 
period remaining to maturity of each bond and the percentage of the 
UIT's portfolio that consists of each bond. Because yield to maturity 
reflects any premium or discount at which a bond may be trading, ELTR 
addressed the primary limitation of the ECR formula and the concerns of 
the staff.

    \8\From 1970 to 1980 interest rates on six-month treasury 
securities ranged from 5.25% in 1976 to 11.43% in 1980. See 
Statistical Abstracts of the United States, U.S. Department of 
Commerce, 522-23 (1981) (based on annual averages of monthly data 
for interest rates between 1970 and 1980). In the 1980s, interest 
rates on six-month treasury securities ranged from 13.81% in 1981 to 
6.02% in 1986. See Statistical Abstracts of the United States, U.S. 
Department of Commerce, 525 (1994) (based on annual averages of 
monthly data for interest rates between 1980 and 1990).
    \9\The staff became aware of these UITs during its routine 
review of pre-effective offerings. Several articles in the financial 
press also raised questions whether ECR was an appropriate measure 
of yield for a UIT that held significant investments in premium 
bonds. See e.g., Weberman, Doesn't Honesty Sell? Forbes, Oct. 16, 
1989, at 297.
    \10\In 1989, an ad hoc committee of UIT sponsors, formed to 
study the calculation of UIT yield, submitted to the Commission a 
proposed uniform UIT yield formula. Letter from James J. Wesolowski, 
Vice President and General Counsel, John Nuveen & Co. Inc., to 
Robert E. Plaze, Special Counsel, Division of Investment Management 
(Apr. 11, 1989). Subsequently, the Investment Company Institute 
submitted a revised UIT yield formula. Letter from David Silver, 
President, Investment Company Institute, to Kathryn B. McGrath, 
Director, Division of Investment Management (Dec. 7, 1989). A copy 
of each letter is contained in File No. S7-32-95.
    \11\At the time, the Commission's Division of Investment 
Management adopted a policy of not exercising its delegated 
authority to accelerate the effectiveness of any UIT registration 
statement the prospectus of which disclosed the UIT's ECR unless the 
prospectus also contained the UIT's ELTR. See letter to Registrants 
from Carolyn B. Lewis, Assistant Director, Division of Investment 
Management (Jan. 11, 1990). Subsequent to the Division's 1990 
letter, the Directors of the Divisions of Market Regulation and 
Investment Management sent a letter to UIT sponsors and broker-
dealers that are active in the UIT secondary market stating that 
quotations of a UIT's ECR should be accompanied by a quotation of 
the UIT's ELTR, if the ECR varies materially from the estimated 
long-term return of the trust. Letter from Marianne K. Smythe, 
Director, Division of Investment Management, and William H. Heyman, 
Director, Division of Market Regulation (Apr. 8, 1992). A copy of 
each letter is contained in File No. S7-32-95.
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    Since 1989, the UIT industry and the Commission's staff have held 
discussions to develop a permanent UIT yield formula. In March of this 
year, the Investment Company Institute (``ICI'') submitted to the 
Commission a rulemaking proposal to standardize the calculation of UIT 
yield based on a revised ELTR formula.12 The revisions primarily 
were intended to address deficiencies in the application of the ELTR 
formula to trusts with short-term termination dates (or trusts that are 
likely to terminate in the near future due to bonds in the trust's 
portfolio being called). The Division of Investment Management, in a 
letter to the ICI, stated that it would not object to the use of the 
ELTR formula, revised in accordance with the ICI's proposal, until the 
Commission adopts rule and form amendments concerning a uniform yield 
formula for UITs.13

    \12\See letter from Craig S. Tyle, Vice President and Senior 
Counsel, Investment Company Institute, to Robert E. Plaze, Assistant 
Director, Division of Investment Management (Mar. 24, 1995). A copy 
of this letter is contained in File No. S7-32-95.
    \13\Investment Company Institute, (pub. avail. Aug. 2, 1995).
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II. Discussion

    The Commission is now proposing to adopt rule and form amendments 
to codify a uniform method for the calculation of yield by UITs. The 
proposed Estimated Yield Formula is based largely on the ELTR formula 
but, as suggested by the ICI's most recent submission and described in 
more detail below, would include an adjustment that would require a 
trust that charges a sales load to reflect the amortization of the load 
based on the weighted-average expected life of the trust's portfolio 
securities. The proposed Estimated Yield Formula would be used to 
determine the yield of newly offered trusts, as well as for trusts the 
units of which trade in a secondary market.

A. Proposed Estimated Yield Formula

    Under the proposed Estimated Yield Formula, a Fixed Income UIT 
would calculate its Estimated Yield by first calculating the average 
yield to maturity, weighted by market value and time to maturity, of 
its portfolio securities, reducing this yield by trust expenses 
(expressed as a percentage), and multiplying the remainder by a 
percentage representing the net amount of the trust's offering price 
that is invested.14 The proposed Estimated Yield Formula would 
then require a Fixed Income UIT to reduce the resulting ratio by a 
``sales charge factor'' to reflect the ``cost'' to a UIT investor of 
not receiving upon termination of the trust (or upon sale or redemption 
of the units or partial liquidation of the trust) the portion of the 
amount initially invested that represents sales load. Thus, the 
proposed Estimated Yield Formula would not only reflect premiums or 
discounts on portfolio securities, but also the ``premium'' an investor 
who is charged a sales load pays for the units.

    \14\This last step reflects that a portion of the offering price 
will be deducted in the form of a sales load and thus, will not be 
invested and earn income for the unitholder. As discussed infra 
section II.A.1. of this Release, this step does not, however, 
reflect the effect on investor return that the amount of the sales 
load will not be returned to the investor at the termination or 
redemption of the trust.
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1. Sales Load
    a. Front-End Sales Loads. Most investors in an initial offering of 
a UIT pay at the time of purchase a sales load (``front-end'' sales 
load) calculated as a 

[[Page 61456]]
percentage of the public offering price.15 Although the ELTR 
formula currently being used reflects that a portion of the offering 
price representing sales load will not be invested (and thus will not 
earn interest for the unitholder), it does not amortize sales load to 
reflect the effect on investor return of not receiving the sales load 
at the termination of the trust or redemption of the units. This 
limitation has the greatest effect for yield calculations involving 
short-term trusts and trusts that are likely to terminate in the near 
term due to bonds in the portfolio being called.16 In attempting 
to deal with this limitation, the proposed Estimated Yield Formula 
would require Fixed Income UITs to amortize sales load to reflect more 
accurately the effect of sales load on investor return.

    \15\Some UITs, pursuant to a Commission exemptive order, have 
implemented deferred or installment loads. See discussion infra 
section II.A.1.b.
    \16\For example, assuming the trust in supra note 7 charged a 
4.8% sales load and matured in five years, the ELTR of the trust 
would be 8.09%, although the investor's actual return would be 
6.34%.
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    Under the proposed formula, a Fixed Income UIT would amortize sales 
load over a time period (``amortization period'') determined by 
averaging the ``expected lives'' of the bonds in the trust weighted by 
market value.17 The expected life of most bonds in the portfolio 
would be determined by each bond's maturity date.18 To account for 
the possibility of an early redemption of the bonds, however, the 
proposed Estimated Yield Formula would require trusts to calculate the 
expected life of a bond with call features by comparing the bond's 
yield to maturity to the bond's yield to ``worst'' call (the call 
feature to which the bond is priced that would result in the bond's 
lowest yield).19 A bond's worst call date would be used if the 
bond's yield to maturity exceeds its yield to worst call by more than 
40 basis points.20

    \17\Instruction 8 to the proposed Estimated Yield Formula. For 
purposes of simplification, proposed amendments to rule 482, 
(requiring disclosure in trust advertisements and sales literature), 
would refer to the expected life of each bond in the trust as the 
``expected life of the trust.'' Proposed rule 482(f) under the 1933 
Act [17 CFR 230.482(f)].
    \18\The maturity date is the date upon which the principal of a 
debt security becomes due and payable to the securityholder. See 
Glossary of Municipal Securities Terms, Municipal Securities 
Rulemaking Board, (Adapted from the State of Florida's Glossary of 
Municipal Bond Terms) (1985).
    \19\Rules adopted by the Municipal Securities Rulemaking Board 
(``MSRB'') require that, when confirming customer orders, yield be 
calculated to the lowest yield to call, yield to par option, or 
yield to maturity (``yield to worst''). This assures that an 
investor will realize, at a minimum, the stated yield, even in the 
event that a call provision is exercised. MSRB Rule G-15(a)(i)(I), 
MSRB Manual (CCH) para.3571.
    \20\Maturity date would be used to determine the expected life 
of any bond priced at par or at a discount and for any bond priced 
at a premium if the bond's yield to maturity does not exceed the 
bond's yield to worst call by more than 40 basis points (.4%).
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    The Commission considered requiring, as an alternative method of 
determining the amortization period, the use of the weighted average of 
each bond's worst call date as the expected life of the trust. In its 
submission, the ICI explained that this alternative may underestimate 
the life of a bond (and thus, the expected life of the trust), 
particularly when transaction costs would make many refundings 
economically infeasible.21 Because the likelihood of a bond being 
called depends in large part on whether the refunding will provide 
sufficient savings to the issuer, the ICI stated that the ``spread'' 
between a bond's yield to maturity and its yield to call would provide 
an appropriate measure for determining a bond's expected life--the 
greater the savings for the issuer, the more likely the bond will be 
called.

    \21\See letter from Craig S. Tyle, Vice President and Senior 
Counsel, Investment Company Institute, supra note 12.
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    The Commission also considered an alternative that would require 
the amortization period to be determined by the expected life of the 
trust. The Commission is not proposing this method because such a 
method would permit a trust sponsor to lengthen the amortization period 
by including one long-term bond in a trust consisting of bonds that 
have much shorter maturities.22 Moreover, such a method would 
appear not to reflect accurately the effect on investor return of an 
early partial or complete liquidation of the trust and, thus, would 
result in an amortization period that is too long. In the same way 
sales load affects yield on an investment in a short-term trust more 
than an investment in a long-term trust, a unitholder's yield from an 
investment in a long-term trust will be affected if a portion of the 
investment is returned before maturity. To account for these effects, 
under the proposed formula, sales load would be amortized over the time 
each dollar of a unitholder's investment can be expected to remain 
invested, assuming the unitholder does not sell or redeem trust units 
before termination of the trust.

    \22\Id.
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    The proposed Estimated Yield Formula would amortize the sales load 
over the amortization period using a method designed to reduce annual 
yield by an amount equal to a stream of future annual payments that 
equate to the amount of the front-end sales load. Comment is requested 
on the proposed Estimated Yield Formula's method of amortization of 
sale load and, specifically, on alternative methods that might reflect 
more accurately the effect of sales load on investor return. Comment is 
requested on an alternative method that would require sales load to be 
amortized by treating the load as an additional premium in a bond's 
yield to maturity calculation. This alternative would require a trust 
to calculate each bond's yield to maturity by adding to the price of 
the security an amount equal to the security's pro rata portion of the 
sales load weighted by the security's market value.23 In addition, 
comment is requested on a straight-line amortization method (i.e., 
dividing the sales load by the amortization period) and whether this 
alternative would provide a simpler method for amortizing sales load.

    \23\Under this alternative, the portfolio's weighted average 
yield to maturity would not be reduced by multiplying the yield by a 
percentage representing the net amount of the trust's offering price 
that is invested.
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    b. Deferred Sales Loads. The Commission has issued several 
exemptive orders permitting UITs to impose sales charges on units on a 
deferred basis.24 Under the terms of the exemptions, a UIT sponsor 
determines the maximum sales charge per unit at the time portfolio 
securities are deposited in a trust, and the sales charge is paid by 
the unitholder in installments over a period following the purchase of 
the units.25 The proposed Estimated Yield Formula would require 
Fixed Income UITs to use the maximum sales load, determined by the 
sponsor at the time of deposit, for calculating Estimated Yield of 
trusts whose unitholders pay a deferred or installment load.26

    \24\See Merrill Lynch, Pierce, Fenner & Smith, Inc., Investment 
Company Act Rel. Nos. 13801 (Feb. 29, 1984) [49 FR 8512 (Mar. 7, 
1984)]; 13848 (Mar. 27, 1984) [30 SEC Docket 192]; 15120 (May 29, 
1986) [51 FR 20389 (June 4, 1986)]; and 15167 (June 24, 1986) [35 
SEC Docket 1735]. PaineWebber, Inc., Investment Company Act Rel. 
Nos. 20755 (Dec. 6, 1994) [59 FR 64003 (Dec. 12, 1994)]; and 20819 
(Jan. 4, 1995) [58 SEC Docket 1586].
    \25\Id. The installments are paid from the distributions of the 
trust until the maximum sales charge is collected. If distribution 
income is insufficient to pay a deferred sales charge installment, 
the trustee, under the terms of the trust indenture, will 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 the redemption or sale.
    \26\Instruction 7 to the proposed Estimated Yield Formula. 

[[Page 61457]]

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2. Compounding
    The proposed Estimated Yield Formula would omit a step proposed by 
the ICI in which a trust's average yield to maturity is divided by 
twelve and re-annualized using a method that, in effect, would compound 
a monthly yield. The Commission is concerned that such a calculation 
could materially overstate the anticipated yield of a trust and is not 
proposing to provide for compounding of a trust's average yield to 
maturity.
    In its request for rulemaking and in other correspondence with the 
staff, the ICI has argued that Fixed Income UITs primarily compete with 
mutual funds.27 Mutual funds calculate yield according to a 
Commission formula that effectively compounds earnings.28 The ICI 
believes that Fixed Income UITs also should be permitted to compound 
earnings or they would be placed at a competitive disadvantage to 
mutual funds.29

    \27\See letter from Craig S. Tyle, Vice President and Senior 
Counsel, Investment Company Institute, supra note 12; letter from 
David Silver, President, Investment Company Institute, supra note 
10; letter from Craig S. Tyle, Associate General Counsel, Investment 
Company Institute, to Gene Gohlke, Acting Director, Division of 
Investment Management (June 29, 1990). A copy of each letter is 
contained in File No. S7-32-95.
    \28\Item 22(b) of Form N-1A under the 1940 Act [17 CFR 274.11A].
    \29\In an earlier submission, however, the UIT industry asserted 
that the formula should replicate the yield of a bond. See letter 
from James J. Wesolowski, Vice President and General Counsel, John 
Nuveen & Co. Inc., supra note 10. This submission included a 
proposed formula, the ELTR formula UITs currently use to calculate 
yield, that does not compound yield to maturity.
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    The compounding element of the mutual fund yield formula reflects 
the internal compounding of dividends within mutual funds as a result 
of their reinvestment of interest from bonds (and other securities) 
upon receipt. Because of the fixed nature of UITs, interest payments 
received are not reinvested, but are held by the trust's custodian 
until they are distributed to unitholders, and thus no compounding 
occurs within the UIT.30 The ICI has suggested, however, that 
because dividends distributed to unitholders may be reinvested in a 
mutual fund made available by a UIT sponsor, unitholders may obtain the 
benefits of compounding. A similar argument may be made for compounding 
the calculation of yield to maturity of a bond. In both the cases, 
however, such a yield would not constitute a yield from an investment, 
but from an investment plan. Moreover, the ICI's proposed formula would 
assume reinvestment of interest payments immediately upon receipt by 
the trust and would not reflect the delay from the time a trust 
receives the coupon payments until it distributes those payments to 
unitholders, when only then could they reinvest the 
distributions.31

    \30\To the extent that the use of the dividends and other income 
by the trust custodian before their distribution reduces the 
custodian's fees and thus UIT expenses, their use already would be 
reflected in the proposed Estimated Yield Formula as a higher 
resulting Estimated Yield.
    \31\See letters from the Investment Company Institute cited in 
supra note 27.
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    In developing this proposal and reviewing the ICI proposal, the 
Commission has been primarily concerned with the accuracy of the 
formula. Compounding yield to maturity of a trust's portfolio 
securities would result in a trust advertising an Estimated Yield of 
the UIT that is higher than the yield an investor would have obtained 
if the investor purchased each security outside of the UIT. For 
example, if a bond trading at par with a yield to maturity of 8 percent 
is deposited into a UIT (assuming no trust expenses or sales load), the 
ICI-proposed formula would produce a yield of 8.13 percent.32 To 
avoid such a result, the Commission is not proposing that the Estimated 
Yield Formula provide for compounding.

    \32\Higher yields would produce greater differences between the 
yields.
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    Comment is requested whether the Estimated Yield Formula should 
contain an element of compounding. Commenters supporting compounding 
should address the variance that would be created between the yields to 
maturity of the bonds in which UITs invest and Estimated Yield that 
would be calculated under such a formula.
3. Accrued Interest
    The public offering price of units of a Fixed Income UIT includes 
not only the price of the securities in a portfolio plus a sales 
charge, but also a proportionate share of accrued interest of each 
security in the trust.33 The amount an investor pays for the 
purchase of a bond, also includes accrued interest. The calculation of 
a bond's yield to maturity excludes consideration of the accrued 
interest because it will be returned to bondholders upon receipt of the 
next interest payment. Thus, the amount of accrued interest paid by a 
purchaser of a bond does not represent part of the bondholder's 
investment. In contrast, all of the accrued interest paid by a 
unitholder of a UIT will not be returned in the trust's first 
distribution; some or all will remain part of the net asset value of 
the trust and will be used to eliminate fluctuations in periodic 
distributions and to compensate the trustee who has use of the cash.

    \33\Accrued interest on the purchase of a bond is the dollar 
amount of interest, based on the coupon rate of interest, which has 
accumulated on a security from the most recent interest payment date 
up to but not including the date of settlement of the purchase. 
Accrued interest is paid to the seller by the purchaser of a bond.
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    Unitholders generally receive equal distributions, on a monthly, 
quarterly, semi-annual, or annual basis, based on the interest income 
of the bonds in the portfolio less expenses. Because interest on the 
bonds is not received at a constant rate throughout the year, a trust 
may not have cash from interest payments available to meet 
distributions to unitholders at the end of a period. In such a case, 
the trustee will draw on the accrued interest account, which will be 
replenished during a period in which interest is received in excess of 
what is needed to make distributions to unitholders. A trust's retained 
accrued interest balance generally remains positive after the trust's 
first distribution.34 Each unit's proportionate share of retained 
accrued interest, if any, is part of the trust's net asset value. As 
such, it is returned to unitholders upon redemption, sale of a unit, or 
liquidation of the trust.35

    \34\See letter from David Silver, President, Investment Company 
Institute, supra note 10.
    \35\In addition, as securities in the portfolio mature, or are 
called or sold, the accrued interest applicable to such bonds is 
distributed to unitholders.
---------------------------------------------------------------------------

    The proposed Estimated Yield Formula would reflect the delay in 
repayment of accrued interest by treating accrued interest as of the 
date of deposit as a trust asset.36 The formula would achieve this 
result by requiring Fixed Income UITs, in calculating the yield to 
maturity of each bond in the trust's portfolio, to subtract from the 
amount of the bond's first coupon payment and to add to the amount of 
the bond's last coupon payment the amount of the bond's accrued 
interest as of the date of deposit of the bond in the trust.37 The 
Commission requests comment on the proposed treatment of accrued 
interest under the Estimated Yield Formula.

    \36\In its 1989 submission, the ICI proposed to treat accrued 
interest as a non-earning asset, although the method used would have 
been different from that of the proposed Estimated Yield Formula, 
reflecting differences in the two formulas. See letter from David 
Silver, President, Investment Company Institute, supra note 10. The 
ICI's 1995 submission, upon which the Estimated Yield Formula is 
based, does not appear to provide for similar treatment.
    \37\Instruction 2 to the proposed Estimated Yield Formula. This 
Instruction would not apply to trusts in which all accrued interest 
at the date of deposit is paid by the sponsor or a person other than 
a unitholder.

[[Page 61458]]

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4. Principal Cash Balances
    Units purchased in the secondary market often have, as a component 
of their net asset value, cash balances that represent proceeds from 
bonds that have matured, or have been redeemed, called, or sold. This 
cash is held by the trust in the form of principal account cash 
balances to be distributed to unitholders as part of the next 
distribution. These amounts are returned to unitholders shortly after 
their receipt by the trust and do not represent part of the 
unitholders' investment. Thus, the proposed Estimated Yield Formula 
would exclude these amounts from the calculation of the trust's net 
asset value.38

    \38\In its 1989 submission, the ICI suggested a similar 
treatment of principal account cash balances. See letter from David 
Silver, President, Investment Company Institute, supra note 10.
---------------------------------------------------------------------------

5. Market Discount on Tax Exempt Securities
    The proposed Estimated Yield Formula would require Fixed Income 
UITs, in determining the yield to maturity of tax exempt securities 
held by the trust, to exclude any market discount that would be treated 
as capital gain under federal income tax.39 In its 1989 
submission, the ICI proposed an alternative that would permit Fixed 
Income UITs to quote an Estimated Yield that reflects the accretion of 
market discount and to disclose the portion of that yield that could be 
subject to federal income tax.40 The Commission is not proposing 
to include the ICI's proposed alternative in the determination of 
Estimated Yield out of concern that the ICI's approach would lead to a 
confusing multiplicity of Estimated Yield quotations, particularly for 
prospective investors in trusts quoting more than one yield because of 
different distribution options.41 The Commission requests comment 
on the Estimated Yield Formula's proposed treatment of market discount 
on tax exempt securities.

    \39\Instruction 5 to the proposed Estimated Yield Formula. This 
approach is similar to the treatment of market discount on tax 
exempt securities by the mutual fund yield formula. See Instruction 
1(e) to Item 22(v)(ii) to Form N-1A under the 1940 Act [17 CFR 
274.11A].
    \40\See letter from David Silver, President, Investment Company 
Institute, supra note 10.
    \41\See discussion supra section II.A.3.
---------------------------------------------------------------------------

6. Preferred Stock, Asset-Backed Securities, and Adjustable-Rate 
Securities
    As discussed above, the proposed Estimated Yield Formula is 
designed to measure the anticipated yield from a portfolio of fixed 
income securities that yield income at a predictable rate. Most UITs 
that invest their assets in corporate, municipal, or U.S. government 
bonds invest almost exclusively in these securities. These securities 
are issued with stated maturities and fixed interest rates, and thus, 
the yield of trusts that invest in these securities can be estimated 
with reasonable certainty. A Fixed Income UIT, however, may have some 
of its assets invested in preferred stock, asset-backed 
securities,42 or adjustable-rate securities,43 the issuers of 
which have no legal obligation to pay a fixed amount of interest or 
dividends. Because the income from these securities is not as 
predictable as the income from traditional bonds, the Commission is 
proposing to require trusts holding these instruments to disclose in 
their prospectuses, advertisements, and sales literature that some of 
their assets are invested in these types of securities and that, as a 
result, their yields likely will fluctuate.44

    \42\The cash flows of asset-backed securities, including 
mortgaged-backed securities, are based on an underlying pool of 
mortgages or other income-producing assets. See F. Fabozzi, The 
Handbook of Fixed Income Securities, 16-19 (4th ed. 1995).
    \43\Adjustable-rate securities, including floating-rate and 
variable-rate securities, have interest rates that adjust 
periodically over their stated life. Id. at 7.
    \44\Instruction 15 to the proposed Estimated Yield Formula. The 
proposed Estimated Yield Formula also would provide specific 
instructions for calculating yield to maturity for these securities 
and for determining their expected life for purposes of amortizing 
sales load. Instructions 12-14 to the proposed Estimated Yield 
Formula.
---------------------------------------------------------------------------

    Approximately three percent of the assets of UITs are invested in 
trusts substantially all the assets of which consist of preferred 
stock, asset-backed securities, or adjustable-rate securities.45 
The Commission is proposing that these UITs use the proposed formula to 
calculate yield, but would require them to characterize the yield as 
``Current Yield'' to emphasize that it does not represent a rate an 
investor can expect to receive in the future. In addition, these trusts 
would be required to provide a statement that, because the continued 
payment of interest (and return of principal for asset-backed 
securities) for these types of securities cannot be predicted, the 
trust's yield will vary and, as a result, actual investor experience 
will be different from the quoted yield.46

    \45\Source: Investment Company Institute.
    \46\Instruction 16 to the proposed Estimated Yield Formula.
---------------------------------------------------------------------------

    The Commission requests comment on the proposed treatment of 
preferred stock, asset-backed securities, and adjustable-rate 
securities. Specifically, the Commission requests comment whether the 
proposed disclosure adequately would inform investors of the 
uncertainty of yield estimates for trusts that invest in these types of 
securities. The Commission also requests comment whether the proposed 
formula should define those trusts that invest ``substantially'' all 
their assets in preferred stock, asset-backed securities, and 
adjustable-rate securities and, if so, what that definition should be.
7. Units of Other Trusts
    Fixed Income UITs sometimes hold units of other trusts in their 
portfolios. Although the Estimated Yield of these trusts could be used 
as their yield to maturity in the Estimated Yield Formula, in its 1989 
submission the ICI urged that the Commission not adopt such a 
requirement because it would be complicated and burdensome. According 
to the ICI, in many cases these trusts are no longer offered in the 
secondary market and thus the trust sponsor no longer calculates their 
yield.47 Instead, the ICI suggested that the Commission permit 
UITs to calculate the yield to maturity of these units based on the 
average dollar price, average coupon rate, and average yield to 
maturity of the securities held by the trust.48 The Commission is 
proposing the approach recommended by the ICI, but only for units of 
trusts that are not currently calculating Estimated Yield.49

    \47\See letter from David Silver, President, Investment Company 
Institute, supra note 10.
    \48\Id.
    \49\Instruction 6 to the proposed Estimated Yield Formula.
---------------------------------------------------------------------------

8. Tax Equivalent Yield
    The proposed Estimated Yield Formula would provide Fixed Income 
UITs a method of calculating a tax equivalent yield.50 A tax 
equivalent yield would demonstrate the taxable yield necessary to 
produce an after-tax yield equivalent to that of a trust which invests 
in tax exempt securities. Under the proposal, tax equivalent yield 
would be calculated by dividing that portion of the yield of the trust 
that is tax exempt by one minus a stated income tax rate and adding to 
the product that portion, if any, of the yield of the trust that is not 
tax exempt.51 This would provide a 

[[Page 61459]]
uniform method for calculating tax equivalent yield.52 The 
Commission requests comment on the proposed method of calculating tax 
equivalent yield for Fixed Income UITs. In addition, the Commission 
requests comment whether bonds that distribute interest income that may 
be subject to the alternative minimum tax under Federal tax law should 
be considered taxable bonds for purposes of the proposed Estimated 
Yield Formula. The Commission requests comment whether, if these bonds 
are not considered taxable bonds, additional disclosure should be 
required by trusts holding themselves out as distributing tax exempt 
income but which invest in bonds that distribute interest income that, 
when distributed to unitholders, may be subject to the alternative 
minimum tax.

    \50\UITs would not be required to quote a tax equivalent yield.
    \51\Instruction 10 to the proposed Estimated Yield Formula. The 
proposed method of calculating tax equivalent yield is similar to 
the mutual fund yield formula's method of calculating tax equivalent 
yield. See Item 22(b) of Form N-1A under the 1940 Act [17 CFR 
274.11A].
    \52\A UIT that includes a quotation of tax equivalent yield in 
its prospectuses, advertisements and sales literature would be 
required to provide a quotation of its Estimated Yield at least as 
prominently as its tax equivalent yield.
---------------------------------------------------------------------------

B. Scope of Application of the Proposed Estimated Yield Formula

1. Prospectuses
    The Commission is proposing to amend Form S-6 to require Fixed 
Income UITs to include in the summary financial data, typically 
provided in the front part of each UIT prospectus, a quotation of its 
Estimated Yield. The proposed Estimated Yield Formula would define 
``Fixed Income UITs'' as trusts investing substantially all their 
assets in bonds and other debt instruments, preferred stock, or a 
combination of these types of securities. Comment is requested on the 
proposed definition of Fixed Income UITs. Comment is specifically 
requested whether the Estimated Yield Formula should define the term 
``substantially,'' and, if so, what that definition should be.
    The amendments would not preclude a trust from including a 
quotation of the UIT's ECR provided that, under the circumstances, the 
ECR is not misleading and that the differences between ECR and 
Estimated Yield are clearly described in the prospectus. As proposed, 
the amendments would require a trust using ECR or some other method of 
estimating return (e.g., ELTR) to include a brief description of the 
differences between Estimated Yield and the other method and a 
statement that the trust's Estimated Yield is calculated following a 
Commission-prescribed formula designed to estimate the yield an 
investor holding a unit for the expected life of the trust may 
receive.53

    \53\Paragraph (f)(3) of the proposed Estimated Yield Formula.
---------------------------------------------------------------------------

2. Advertisements and Sales Literature
    The Commission is proposing to amend rule 482 under the 1933 Act 
and rule 34b-1 under the 1940 Act to require Fixed Income UITs to 
include a quotation of Estimated Yield, as prescribed by Form S-6, in 
their advertisements and sales literature that contain a quotation of 
yield, or other similar quotation purporting to demonstrate the income 
earned or distributions made or to be made by a Fixed Income 
UIT.54 Advertisements and sales literature of Fixed Income UITs 
that contain a quotation of yield also would be required to contain a 
legend disclosing that the Estimated Yield quoted is an estimate of the 
rate of return an investor holding a unit for the expected life of the 
trust may receive, actual return to the investor may vary from the 
estimate, and that an investor's units, when redeemed, may be worth 
more or less than their original cost.55 As discussed above, Fixed 
Income UITs that invest substantially all or a portion of their assets 
in preferred stock, asset-backed securities, or in adjustable-rate 
securities would be required to provide additional disclosure in their 
advertisements and sales literature.56

    \54\Proposed rule 482(f) under the 1933 Act [17 CFR 230.482(f)]; 
proposed rule 34b-1(c)(2) under the 1940 Act [17 CFR 270.34b-
1(c)(2)].
    \55\Proposed rule 482(a)(8) under the 1933 Act [17 CFR 
230.482(a)(8)]; proposed rule 34b-1(c)(1) under the 1940 Act [17 CFR 
270.34b-1(c)(1)].
    \56\Instructions 15-16 to the proposed Estimated Yield Formula.
---------------------------------------------------------------------------

    Under the proposed amendments, UITs may continue to advertise 
performance information other than Estimated Yield or Current Yield, 
including ECR, if a quotation of Estimated Yield is included at least 
as prominently as the other performance information. The Commission 
requests comment whether the performance information permitted in all 
Fixed Income UIT advertisements should be limited to the yields 
calculated pursuant to the proposed Estimated Yield Formula.
3. Secondary Market Sales
    As discussed above, sponsors generally maintain a secondary market 
in units of the UITs they sponsored. Sponsors typically repurchase 
units at the redemption price or net asset value of the trust based on 
the bid side evaluation of the bonds and resell the units to new 
investors based on the offer side evaluation of the bonds. The proposed 
Estimated Yield Formula would require that UITs calculate Estimated 
Yield based on the maximum offering price per unit, which, in the case 
of a trust the units of which are trading in a secondary market, would 
be the price at which the sponsor is willing to resell the 
units.57

    \57\Instruction 11 to the proposed Estimated Yield Formula.
---------------------------------------------------------------------------

    In some cases, an investor who purchases a UIT in the secondary 
market will be charged a sales load. The proposed Estimated Yield 
Formula would require UITs to include in the public offering price of 
the units the maximum sales load that may be charged to an investor in 
the secondary market.58

    \58\Id.
---------------------------------------------------------------------------

C. Alternative Formula

    The Commission requests comment whether, in lieu of the Estimated 
Yield Formula, the Commission should require a trust to calculate and 
disclose a yield measured by the trust's internal rate of return 
(``IRR''). IRR is the discount rate that would make the amount paid by 
the investor for the investment (including sales load) equivalent in 
value to the payments expected from the trust.59 Unlike the 
Estimated Yield Formula, IRR would take into consideration different 
cash flows unitholders selecting different distribution options will 
receive. The Commission's staff has discussed with the ICI the 
desirability and feasibility of a UIT yield formula based on a trust's 
IRR.60 In correspondence with the staff in 1990, the ICI asserted 
that the amount of computer time required to generate IRR for each 
distribution option for each trust would be so great as to 
significantly disrupt UIT sponsors' computer operations and increase 
UIT expenses.61 In light of the significant advancements in 
computer technology over the past several years, the Commission 
requests comment whether calculation of IRR would be feasible, and, if 
so, whether IRR could provide an accurate but simpler method for 
calculating UIT yield than the Estimated Yield Formula.

    \59\See F. Fabozzi, supra note 42 at 71-72.
    \60\Letter from Kathryn B. McGrath, Director, Division of 
Investment Management, to David Silver, President, Investment 
Company Institute (Apr. 17, 1990). A copy of this letter is 
contained in File No. S7-32-95.
    \61\Letter from Craig S. Tyle, Associate General Counsel, 
Investment Company Institute, supra note 27. 

[[Page 61460]]

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III. General Request for Comments

    Any interested persons wishing to submit written comments on the 
rule and form changes that are the subject of this release, to suggest 
additional changes, or to submit comments on other matters that might 
have an effect on the proposals contained in this release, are 
requested to do so.

IV. Cost/Benefit Analysis

    The rule and form changes proposed today are intended to improve 
information regarding the estimated yield of UITs provided to investors 
by requiring that yield be uniformly calculated in a manner reasonably 
likely to provide a ``best estimate'' of the return in an investment in 
a UIT. The Commission believes that any resulting increase in the 
expenses of UITs and their sponsors will be small, particularly in 
relation to the benefit of preventing the advertisement of misleading 
or inaccurate information.
    The proposed formula is not expected to be significantly more 
costly to calculate than current formulas used in connection with UIT 
offerings. The proposed amendments therefore should result in little 
increase in the cost of calculating or advertising performance 
information. Converting to the use of a new formula (e.g., 
reprogramming computers) would involve certain costs, but the costs of 
any conversion should be outweighed by the benefits of more accurate 
UIT yield figures.

V. Summary of Initial Regulatory Flexibility Act Analysis

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis in accordance with 5 U.S.C. 603 regarding the proposed 
amendments. The analysis reiterates the reasons and objectives for the 
proposed amendments discussed above in this Release. The analysis also 
describes the legal basis for the proposal and discusses its effect on 
small entities as defined by the 1940 Act. In addition, the analysis 
considers several alternatives to the proposed amendments such as 
requiring a trust to calculate its IRR. The analysis notes, however, 
that these alternatives would not be less costly than the proposed 
Estimated Yield Formula. The analysis also notes that the proposed 
Estimated Yield Formula is based on a proposal submitted by the UIT 
industry. Other aggregate cost-benefit information reflected in the 
``Cost/Benefit Analysis'' section of this release also is reflected in 
the analysis. A copy of the analysis may be obtained by contacting 
Anthony R. Bosch, Office of Disclosure and Investment Adviser 
Regulation, Division of Investment Management, Securities and Exchange 
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

VI. Paperwork Reduction Act

    Certain provisions of the proposed rule and form amendments contain 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 [44 U.S.C. 3501 et seq.], and the 
Commission has submitted the rule and form amendments to the Office of 
Management and Budget for review in accordance with 44 U.S.C. 3507(d). 
The title for the collection of information is ``Amendments to 
Regulation C, Rule 34b-1, and Form S-6.'' The Supporting Statement to 
the Paperwork Reduction Act submission notes that the proposed 
amendments would amend Form S-6, rule 482, and rule 34b-1 to require 
certain UITs to use a uniform formula to calculate yields quoted in 
their prospectuses, advertisements, and sales literature and that the 
proposed amendments are designed to enhance the ability of prospective 
investors to make informed investment decisions.
    Proposed amendments to Form S-6, Regulation C, and rule 34b-1 would 
have a negligible effect on the annual reporting and cost burden of 
UITs. Because most UITs currently calculate yield quoted in their 
prospectuses, advertisements, and sales literature, the proposed 
amendments should not significantly increase the reporting and cost 
burdens in connection with UIT offerings. Form S-6 is used for 
registration of securities under the 1933 Act by UITs registered under 
the 1940 Act. UITs file approximately 3263 registration statements on 
Form S-6 annually. Form S-6 requires an estimated 35 reporting burden 
hours resulting from the required collection of information. Rule 34b-1 
under the 1940 Act governs sales material that accompany or follow the 
delivery of a statutory prospectus. Approximately 287 respondents 
(including UITs) each file approximately five responses annually 
pursuant to rule 34b-1. The recordkeeping burden from rule 34b-1 
requires approximately 2.4 hours per response resulting from the 
required collection of information. Regulation C provides standard 
instructions to guide registrants filing registration statements under 
the 1933 Act. Regulation C is assigned one burden hour for 
administrative convenience because the rule simply prescribes the 
disclosure that must appear in other filings under the 1933 Act.
    The Commission requests specific comment concerning: whether the 
proposed collection of information is necessary for the proper 
performance of the function of the Commission, including whether the 
information shall have practical utility; on the accuracy of the 
Commission's estimate of the burden of the proposed collection of 
information; on the quality, utility, and clarity of the information to 
be collected; and whether the burden of collection of information on 
those who are to respond, including through the use of automated 
collection techniques or other forms of information technology may be 
minimized.
    Persons desiring to submit comments on the collection of 
information requirements should direct them to the Office of Management 
and Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
D.C. 20503, and should also send a copy of their comments to Jonathan 
G. Katz, Secretary, Securities and Exchange Commission, 450 5th Street, 
Washington, D.C. 20549 with reference to File No. S7-32-95. The Office 
of Management and Budget is required to make a decision concerning the 
collections of information between 30 and 60 days after publication, so 
a comment to the Office of Management and Budget is best assured of 
having its full affect if the Office of Management and Budget receives 
it within 30 days of publication.

VII. Text of Proposed Rule and Form Amendments

List of Subjects

17 CFR Parts 230 and 239

    Reporting and recordkeeping requirements, Securities.

17 CFR Part 270

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

    For the reasons set out in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

    1. The authority citation for Part 230 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 
78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 78t, 80a-8, 80a-29, 80a-30, 
and 80a-37, unless otherwise noted.
* * * * *
    2. By amending Sec. 230.482 by removing the comma at the end of 
paragraphs (a)(1), (a)(2), (a)(3), and (a)(4) and in its place adding a 
semicolon; by 

[[Page 61461]]
removing the ``, and'' at the end of paragraph (a)(5) and in its place 
adding a semicolon; by removing the period at the end of paragraph 
(a)(7) and in its place adding ``; and''; by adding paragraph (a)(8) 
before the note; by redesignating paragraph (f) as paragraph (g); and 
by adding paragraph (f) to read as follows:


Sec. 230.482  Advertising by an investment company as satisfying 
requirements of section 10.

    (a) * * *
    (8) In the case of an advertisement of a Fixed Income UIT, defined 
in Instruction 1 to Form S-6 under the Act, (Sec. 239.16 of this 
chapter), containing a quotation of Estimated Yield, defined in Form S-
6, or other similar quotation purporting to demonstrate the income 
earned or distributions made or to be made by the trust, shall also 
include a legend disclosing that the Estimated Yield quoted is an 
estimate of the rate of return an investor holding a unit for the 
expected life of the trust may receive, actual return to the investor 
may vary from the estimate, and that an investor's units, when 
redeemed, may be worth more or less than their original cost.
* * * * *
    (f) In the case of a Fixed Income UIT, any advertisement containing 
a quotation of yield, or other similar quotation purporting to 
demonstrate the income earned or distributions made or to be made by 
the trust, shall also include a quotation of Estimated Yield that:
    (1) Is based on the method of computation prescribed in Form S-6; 
and
    (2) Identifies the date in which an investment in the trust would 
result in the advertised Estimated Yield.
* * * * *

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

    3. The authority citation for Part 239 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 78l, 
78m, 78n, 78o(d), 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m, 
79n, 79q, 79t, 80a-8, 80a-29, 80a-30 and 80a-37, unless otherwise 
noted.
* * * * *
    4. By amending Form S-6 (referenced in Sec. 239.16) by adding 
paragraph (f) to Instruction 1 of the Instructions As To The Prospectus 
to read as follows:

    Note: The text of Form S-6 does not and the amendments will not 
appear in the Code of Federal Regulations.

Form S-6

* * * * *

Instructions as to the Prospectus

    Instruction 1. Information to be Contained in Prospectus.
* * * * *
    (f) Information Concerning Registrant's Performance.
    Estimated Yield. In the case of a trust that invests 
substantially all of its assets in bonds and other debt instruments, 
preferred stock, or a combination of these types of securities 
(``Fixed Income UIT''):
    (1) Furnish the trust's estimated yield to maturity (``Estimated 
Yield'') calculated as of a day reasonably close to the effective 
date of the registration statement or the commencement of the 
offering:

Estimated Yield = [(a-b) * c] - x
Where,
a = sum of (market value of each security * yield to maturity of 
each security * time to maturity of each security)/sum of (market 
value of each security * time to maturity of each security)
b = total annual expenses of the trust/net asset value of the trust
c = 1 - sales load
[GRAPHIC][TIFF OMITTED]TP29NO95.017

r = (a-b) * c
n = number of annual periods until amortization date.
    (2) Provide a statement that the trust's Estimated Yield is 
calculated following a SEC-prescribed formula designed to estimate 
the yield an investor holding a unit for the expected life of the 
trust may receive, but that actual investor experience may be 
different.
    (3) If the trust provides an estimated rate of return calculated 
using a different method, provide a brief description of the 
relevant differences between the other rate of return and the 
trust's Estimated Yield.

Instructions

Yield to Maturity

    1. In determining the yield to maturity and time to maturity of 
each security in ``a'', consider the maturity of a security with a 
call provision(s) as the date with the lowest resulting yield to 
call, yield to par option, or yield to maturity pursuant to rule G-
15 of the Municipal Securities Rulemaking Board.
    2. In determining the yield to maturity of each security in 
``a'', subtract from the amount of each security's first coupon 
payment and add to the amount of each security's last coupon payment 
the amount of accrued interest of that security as of the date of 
deposit. (This accrued interest also should be included in the price 
of each bond.) In calculating Estimated Yield subsequent to the 
initial offering of the trust, use the same amount of accrued 
interest. In the case of a trust in which all accrued interest at 
the date of deposit is paid by the sponsor or a person other than a 
unitholder, this Instruction does not apply.
    3. In determining the market value of each security and the net 
asset value of the trust in ``a'' and ``b'' respectively, include 
the amount of accrued interest or any advance of accrued interest 
that is paid by unit holders upon purchase of the units.
    4. In determining the net asset value of the trust in ``b'', do 
not include the amount of repayments of principal of securities held 
in a trust's portfolio that are to be distributed to unitholders.
    5. In the case of a tax exempt obligation issued without 
original issue discount and having a current market discount, use 
the coupon rate of interest in lieu of the yield to maturity. Where, 
in the case of a tax exempt obligation with original issue discount, 
and the discount based on the current market value exceeds the then-
remaining portion of original issue discount (market discount), the 
yield to maturity is the imputed rate based on the original issue 
discount calculation. Where, in the case of a tax exempt obligation 
with original issue discount, and the discount based on the current 
market value is less than the then-remaining portion of original 
issue discount (market premium), the yield to maturity should be 
based on the market value.
    6. In the case of a trust that invests in units of other trusts 
for which an Estimated Yield is not available from the sponsor, 
determine the yield to maturity of the other trust using the other 
trust's average dollar price, average coupon rate, and average yield 
to maturity. Determine the other trust's average dollar price by 
dividing the sum of the net asset values of the bonds in the other 
trust by the sum of the par values of the bonds. Determine the other 
trust's average coupon rate and average yield to maturity by 
weighting the coupon rate and yield to maturity of each bond in the 
other trust by its market value.

Sales Load

    7. Sales load in ``c'' and ``x'' is the maximum sales load 
stated as a percentage of the offering price of units. In the case 
of a deferred sales load, the maximum sales load is the aggregate of 
all installment loads, stated as a percentage of the offering price.
    8. In determining the amortization date of a trust in ``n'', 
calculate an average, weighted by market value, of the expected 
lives of the bonds in the trust. To calculate the expected life of 
each bond in the trust:
    (a) For bonds priced at par or at a discount and for bonds 
priced at a premium where the yield to maturity is less than or 
equal to yield to call (as determined by Instruction 1) plus .4% (40 
basis points), use the maturity date of the bond(s); and
    (b) For bonds priced at a premium where yield to maturity is 
greater than yield to call (as determined by Instruction 1) plus .4% 
(40 basis points), use the call date of the bond(s).

Expenses

    9. A trust that has different Estimated Yields for different 
classes of unit holders, (e.g., because of different distribution 
payment options that result in different expense ratios) may include 
a quotation of more than one Estimated Yield. If such a trust quotes 
a single yield, in determining the total annual expenses of the 
trust in ``b'', assume the highest expense ratio is applicable to 
all of the assets of the trust. 

[[Page 61462]]


Tax Equivalent Yield

    10. If a trust quotes a tax equivalent yield, calculate tax 
equivalent yield by dividing that portion of the yield of the trust 
that is tax exempt by one minus a stated income tax rate and adding 
to the product that portion, if any, of the yield of the trust that 
is not tax exempt. Any quotation of tax equivalent yield in the 
trust's prospectus, advertisements, or sales literature, should be 
accompanied by a quotation of Estimated Yield that is given equal 
prominence.

Secondary Market Sales

    11. In calculating Estimated Yield subsequent to the initial 
offering of the trust, use the maximum public offering price at 
which the trust's sponsor is willing to sell trust units to an 
investor and the maximum sales load that may be charged to an 
investor for trust units.

Preferred Stock, Asset-Backed Securities, and Adjustable-Rate 
Securities

    12. In the case of preferred stock:
    (a) In lieu of yield to maturity in determining ``a'', use the 
preferred stock's interest rate calculated by dividing the 
security's dividend by its market value and by annualizing on a 
straight-line method, (e.g., multiply a quarterly payment rate by 
4);
    (b) In determining the amortization date in ``n'', in the case 
of preferred stock that can be converted to common stock or is 
subject to a redemption feature, use as the security's expected 
life: the lesser of the time period to its conversion date, its 
redemption date or the trust's termination date; and
    (c) In determining the amortization date in ``n'', in the case 
of all other preferred stock, use the trust's termination date as 
the security's expected life.
    13. In determining each asset-backed security's yield to 
maturity in ``a'' and in determining each asset-backed security's 
amortization period in ``n'', in lieu of its maturity date, use the 
same ``expected life'' of the security used for calculating the 
price of the security as part of the trust's net asset value.
    14. (a) For adjustable-rate securities not subject to a demand 
feature, use the next reset date as the maturity date for 
calculating yield to maturity in ``a''; and
    (b) For adjustable-rate securities subject to a demand feature, 
use the time remaining until the next demand date or the next reset 
date, whichever is less, as the maturity date for calculating yield 
to maturity in ``a''.
    15. In the case of a trust that invests some of its assets in 
preferred stock, asset-backed securities, or adjustable-rate 
securities, in addition to the disclosure required by paragraph 
(f)(2) of Form S-6, disclose that some of the trust's assets (____%) 
is invested in (preferred stock, asset-backed securities, or 
adjustable-rate securities), and, because the continued payment of 
interest or other income (and return of principal for asset-backed 
securities) for these types of securities cannot be predicted, this 
portion of the trust's yield will vary and, as a result, actual 
investor experience will be different.
    16. In the case of a trust that invests substantially all of its 
assets in preferred stock, asset-backed securities, or adjustable-
rate securities refer to its yield, calculated pursuant to the 
Estimated Yield Formula, as ``Current Yield''; and, in addition to 
the disclosure required by paragraph (f)(2) of Form S-6, disclose 
that, because the continued payment of interest or other income (and 
return of principal for asset-backed securities) for these types of 
securities cannot be predicted, the trust's yield will vary and, as 
a result, actual investor experience will be different. Provide a 
cross-reference to the part of the prospectus in which the portfolio 
securities are described.
    17. In the case of a trust that invests substantially all or a 
portion of its assets in preferred stock, asset-backed securities, 
or adjustable-rate securities and provides a yield in its 
advertisements pursuant to Rule 482 under the Act [17 CFR 230.482], 
or in its sales literature in compliance with Rule 34b-1 under the 
1940 Act [17 CFR 270.34b-1], in lieu of the disclosure required by 
Rule 482(a)(8) under the Act [17 CFR 230.482(a)(8)] or Rule 34b-
1(c)(1) under the 1940 Act [17 CFR 270.34b-1(c)(1)] provide the 
disclosure required by Instructions 15 and 16 (excluding the cross-
reference) as appropriate.

Securities Denominated in Foreign Currencies

    18. In the case of a security denominated in a foreign currency, 
convert its market value into U.S. dollars at the exchange rate in 
effect at the time of calculation.

Additional

    19. Determine Estimated Yield to the nearest hundredth of one 
percent. Use calculations using market price, accrued interest, 
annual periods, expenses, net asset value, or number of years to the 
nearest one thousandth. Base calculations using yield to maturity, 
coupon rate, or sales load to the nearest thousandth of one percent.
    20. In the case of a post-effective amendment to the trust's 
registration statement, calculate the trust's Estimated Yield as of 
a date reasonably close to the date of filing of the post-effective 
amendment.
* * * * *

PART 270--GENERAL RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 
1940

    5. The authority citation for Part 270 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 80a-1 et seq., 80a-37, 80a-39 unless 
otherwise noted;
* * * * *
    6. By revising Sec. 270.34b-1 to read as follows:


Sec. 270.34b-1  Sales literature deemed to be misleading.

    Any advertisement, pamphlet, circular, form letter, or other sales 
literature addressed to or intended for distribution to prospective 
investors that is required to be filed with the Commission by section 
24(b) of the Act [15 U.S.C. 80a-24(b)] (``sales literature'') shall 
have omitted to state a fact necessary in order to make the statements 
made therein not materially misleading unless the sales literature 
includes the information specified in paragraphs (a), (b) and (c) of 
this section.
    (a) Sales literature for a money market fund shall contain the 
information required by paragraph (a)(7) of Sec. 230.482 of this 
chapter.
    (b) Except as provided in paragraph (d) of this section, any sales 
literature containing performance data of an open-end management 
investment company or a separate account registered under the Act as a 
unit investment trust offering variable annuity contracts shall also 
include:
    (1) The disclosure required by paragraph (a)(6) of Sec. 230.482 of 
this chapter; and
    (2) The following additional performance data, which shall meet the 
currentness requirements of paragraph (g) of Sec. 230.482 of this 
chapter:
    (i) Except in the case of a money market fund, the total return 
information required by paragraph (e)(3) of Sec. 230.482 of this 
chapter;
    (ii) In the case of sales literature containing a quotation of 
yield or other similar quotation purporting to demonstrate the income 
earned or distributions made by the company, a quotation of current 
yield specified by paragraph (e)(1) of Sec. 230.482 of this chapter, 
or, in the case of a money market fund, paragraph (d)(1) of 
Sec. 230.482 of this chapter; and
    (iii) In the case of sales literature containing a quotation of tax 
equivalent yield or other similar quotation purporting to demonstrate 
the tax equivalent of income earned or distributions made by the 
company, a quotation of tax equivalent yield specified by paragraph 
(e)(2) and current yield specified by paragraph (e)(1) of Sec. 230.482 
of this chapter, or, in the case of a money market fund, paragraph 
(d)(1) of Sec. 230.482 of this chapter.
    (c) Any sales literature containing a quotation of yield, or other 
similar quotation purporting to demonstrate the income earned or 
distributions made or to be made by a Fixed Income UIT defined in 
Instruction 1 to Form S-6 under the Securities Act of 1933, 
(Sec. 239.16 of this chapter), shall also include:
    (1) The disclosure required by paragraph (a)(8) of Sec. 230.482 of 
this chapter; and
    (2) A quotation of Estimated Yield specified by paragraph (f) of 
Sec. 230.482 of this chapter which shall meet the currentness 
requirements of paragraph (g) of Sec. 230.482 of this chapter. 

[[Page 61463]]

    (d) The requirements specified in paragraph (b) of this section 
shall not apply to any quarterly, semi-annual or annual report to 
shareholders under section 30 of the Act [15 U.S.C. 80a-29], containing 
performance data for a period commencing no earlier than the first day 
of the period covered by the report; nor shall the requirements of 
paragraphs (e)(3)(ii) and (g) of Sec. 230.482 (e)(3)(ii) and (g) apply 
to any such periodic report containing any other performance data.

    Note to Sec. 270.34b-1: Sales literature of an open-end 
management company or a separate account (except that of a money 
market fund) containing a quotation of yield or tax equivalent yield 
must also contain the total return information. In the case of sales 
literature, the currentness provisions apply from the date of 
distribution and not the date of submission for publication.

    Dated: November 22, 1995.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29109 Filed 11-28-95; 8:45 am]
BILLING CODE 8010-01-P