[Federal Register Volume 61, Number 237 (Monday, December 9, 1996)]
[Notices]
[Pages 64931-64933]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31150]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-22363; 812-10066]


OCC Distributors, et al.; Notice of Application

December 2, 1996.
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: OCC Distributors (the ``Sponsor'') and Qualified Unit 
Investment Trust Liquid Series (``QUILTS''), Equity Strategic Ten 
Series; QUILTS, Equity Strategic Five Series; QUILTS, Opportunity Trust 
Series; QUILTS, U.S. Treasury Trust Series; QUILTS, Corporate Trust 
Series; and QUILTS, Municipal Insured Series (the ``Trusts'').

RELEVANT ACT SECTIONS: Order requested pursuant to section 6(c) for 
exemptions from sections 2(a)(32), 2(a)(35), 22(d), and 26(a)(2) of the 
Act and rule 22c-1 thereunder, and pursuant to section 11(a) to 
supersede a prior order (the ``Prior Order'') \1\ for an exemption from 
section 11c).

    \1\ Quest for Value Distributors, Investment Company Act Release 
Nos. 21079 (May 17, 1995) (notice) and 21133 (June 13, 1995)
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SUMMARY OF APPLICATION: Applicants seek to impose sales charges on a 
deferred basis, waive the deferred sales charge in certain cases, and 
offer exchange and rollover privileges at a reduced sales charge that 
would extend to units having deferred sales charges.

FILING DATE: The application was filed on March 28, 1996 and amended on 
July 16, 1996. Applicants have agreed to file an additional amendment, 
the substance of which is incorporated herein, during the notice 
period.

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 December 27, 
1996 and should be accompanied by proof of service on

[[Page 64932]]

applicants, in the form of an affidavit or, for layers, a certificate 
of service. Hearing requests should state the nature of the writer's 
request, the reason for the request, and the issues contested. Persons 
may request notification of a hearing by writing to the SEC's 
Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street N.W., Washington, D.C. 
20549. Applicants, OCC Distributors, Two World Financial Center, 225 
Liberty Street, New York, New York 10080-6116, Attention: Susan A. 
Murphy.

FOR FURTHER INFORMATION CONTACT:
David W. Grim, Staff Attorney, at (202) 942-0571, or Mercer E. Bullard, 
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. Each of the Trusts is a unit investment trust registered as an 
investment company under the Act and is sponsored by the Sponsor. Each 
of the trusts consists of one or more series of separate unit 
investment trusts issuing securities registered under the Securities 
Act of 1933 (``Series''). Applicants request that the relief sought 
herein apply to any future trusts sponsored by the Sponsor, and any 
future series of such trusts.
    2. Each Series is created by a trust indenture among the Sponsor, a 
banking institution or trust company as trustee, and an evaluator. The 
Sponsor acquires a portfolio of securities which it deposits with the 
trustee in exchange for certificates representing units of fractional 
undivided interest in the deposited portfolio (``Units''). The Units 
are then offered to the public through the Sponsor, underwriters, and 
dealers at a public offering price which, during the initial offering 
period, is based upon the aggregate offering side evaluation of the 
underlying securities plus a 0.85% to 4.50% of the public offering 
price, generally depending on the terms of the underlying securities. 
The maximum charge is usually subject to reduction in compliance with 
rule 22d-1, under certain stated circumstances disclosed in the 
prospectus, such as for a volume discount purchase.
    3. Applicants seek a order under section 6(c) exempting them from 
sections 2(a)(32), 2(a)(35), 22(d), and 26(a)(2) of the Act, and rule 
22c-1 thereunder, to the extent necessary to permit them to impose a 
deferred sales charge (``DSC'') on Units, and vary or waive the DSC 
under certain circumstances. Under applicants' proposal, the Sponsor 
will determine the maximum amount of the sales charge per Unit. The 
Sponsor will have the discretion to defer the collection of all of part 
of such sales charge over a period (the ``Collection Period'') 
subsequent to the settlement date for the purchase of Units. The 
Sponsor will in no event add to the deferred amount of the sales charge 
any additional amount for interest or any similar or related charge to 
reflect or adjust for the ``time value of money,'' and the DSC will not 
apply to increases in the value per Unit after the date of purchase.
    4. The Sponsor anticipates collecting a portion of the total sales 
charge ``up-front,'' i.e., immediately upon purchase of Trust Units. 
The balance of the sales charge per Trust Unit as of the initial date 
of deposit will be collected over the Collection Period for the 
particular Series. A ratable portion of the sales charge remaining to 
be collected will be educated from each unitholder's distributions on 
the Units (``Distribution Deductions'') during the Collection Period 
until the total amount of the sales charge per Unit is collected. To 
the extent that distribution income is sufficient to make the requisite 
Distribution Deductions, the trustee will withdraw the appropriate 
amount of the DSC from such distribution income and will pay such 
amount directly to the Sponsor. If distribution income is insufficient 
to pay a DSC installment, the trustee, pursuant to the powers granted 
in the trust indenture, will have the ability to sell portfolio 
securities in an amount necessary to provide the requisite payments.
    5. It is the Sponsor's current intention to deduct any amount of 
unpaid DSC expense from the proceeds of any redemption of Units or any 
sale of Units to the Sponsor. For purposes of calculating the amount of 
the DSC due upon redemption or sale of Units, it will be assumed that 
Units on which the sales charge has been paid in full are liquidated 
first. Any Units liquidated over and above such amounts will be subject 
to the DSC, which will be applied on the assumption that Units held for 
the longest time are redeemed first.
    6. The Sponsor may adopt a procedure of waiving the DSC in 
connection with redemptions or sales of Units under certain 
circumstances. Any such waiver will be disclosed in the prospectus for 
each Series subject to the waiver, and will be implemented in 
accordance with rule 22d-1.
    7. Applicants also request an order under section 11(a) of the Act 
to supersede the Prior Order granting an exemption from section 11(c) 
of the Act. Applicants propose to offer an exchange privilege to 
unitholders of the Trusts at a reduced sales charge (the ``Exchange 
Privilege''). Unitholders would be able to exchange any of their Units 
for Units of one or more available Series of the Trusts (an ``Exchange 
Trust''). Applicants also propose to offer a rollover privilege to 
unitholders of the Trusts at a reduced sales charge (the ``Rollover 
Privilege''). Unitholders would be able to ``roll over'' their Units in 
a Series which is terminating for Units of one or more new Series of 
the Trusts (a ``Rollover Trust''). Applicants seek to supersede the 
Prior Order in order to create a Exchange Privilege and Rollover 
Privilege that would extend to all exchanges of Units sold either with 
a fixed sales charge or with a DSC for Units of an Exchange Trust or 
Rollover Trust sold either with a fixed sales charge or with a DSC.
    8. To exercise the Exchange Privilege or Rollover Privilege, a 
unitholder must notify the Sponsor. Exercise of the Exchange Privilege 
or Rollover Privilege is subject to the following conditions: (a) the 
Sponsor must be maintaining a secondary market in Units of the Trust 
held by the unitholder and Units of the Trust to be acquired in the 
exchange, (b) at the time of the exchange, there must be Units of the 
Exchange Trust or Rollover Trust to be acquired available for sale, and 
(c) exchanges will be in whole units only.
    9. While Units of an applicable Series are normally sold on the 
secondary market with maximum sales charges ranging from 0.85% to 4.50% 
of the public offering price, the sales charge on Units acquired 
pursuant to the Exchange Privilege or Rollover Privilege will generally 
be reduced. In any event, an investor who purchases units under the 
exchange or rollover option will pay a lower sales charge than that 
which would be paid by a new investor. An adjustment will be made if 
Units of any Series are exchanged within five months of their 
acquisition for Units of a Series with a higher sales charge. In this 
case, the exchange fee will be the greater of the applicable reduced 
sales charges previously collected and the normal sales charge of the 
Unit being acquired.

Applicants' Legal Analysis

    1. Under section 6(c), the SEC may exempt any person or transaction 
from any provision of the Act or any rule thereunder to the extent that 
such exemption is necessary or appropriate in the public interest and 
consistent

[[Page 64933]]

with the protection of investors and the purposes fairly intended by 
the policy and provisions of the Act. Applicants believe that their 
proposal meets these standards.
    2. Section 4(2) of the Act defines a ``unit investment trust'' as 
an investment company which ``issues only redeemable securities.'' 
Section 2(a)(32) defines a ``redeemable security'' as a security that, 
upon its presentation to the issuer, entitles the unitholder to receive 
approximately his or her proportionate share of the issuer's current 
net assets, or the cash equivalent of those assets. Applicants state 
that to avoid uncertainty regarding whether the imposition of the DSC 
in the manner described in the application would cause Units of the 
Trust to fall outside the definition of ``redeemable security,'' 
applicants request an exemption from the operation of section 2(a)(32) 
to the extent necessary to permit implementation of the DSC under the 
deferred sales charge program.
    3. Section 2(a)(35) defines the term ``sales load'' to be the 
difference between the sales price and the portion of the proceeds 
invested by the depositor or trustee. Therefore, applicants submit that 
this arrangement is within the section 2(a)(35) definition of sales 
load, but for the timing of the imposition of the charge.
    4. Rule 22c-1, promulgated pursuant to the SEC's authority under 
section 22(c) of the Act, requires that the price of a redeemable 
security issued by an investment company for purposes of sale, 
redemption, and repurchase be based on the security's current net asset 
value. Applicants note that the DSC would be deducted at the time of 
redemption of repurchase from the unitholder's proportionate 
liquidation proceeds. Applicants state that in order to avoid any 
possibility that questions might be raised as to the potential 
applicability of rule 22c-1, applicants request an exemption from the 
operation of the provisions of the rule to the extent necessary or 
appropriate to permit applicants to implement the DSC under the 
proposed deferred sales charge program.
    5. Section 22(d) requires an investment company and its principal 
underwriter and dealer to sell securities only at a current public 
offering price described in the investment company's prospectus. Sales 
loads historically were deemed to be subject to the provisions of 
section 22(d) because they were traditionally a component of the public 
offering price; hence all investors were charged the same sales load. 
Rule 22d-1 was adopted to permit the sale of redeemable securities at 
prices which reflect scheduled variations in the sales load. Applicants 
state that in the interest of clarity, applicants request an exemption 
from the provisions of section 22(d) in order to permit scheduled 
variations or waivers of the DSC under certain circumstances.
    6. Section 26(a)(2), in relevant part, prohibits a trustee or 
custodian of a unit investment trust from collecting from the Trust as 
an expense any payment to a depositor or principal underwriter thereof. 
Applicants state that in order to avoid any possibility that questions 
may be raised as to the propriety of the trustee disbursing sales 
charges to the Sponsor, applicants request an exemption from section 
26(a)(2)(C) to the extent necessary to permit the trustee to collect 
deductions and disburse them to the Sponsor as contemplated by the 
deferred sales charge program.
    7. Section 11(c) prohibits any offers of exchange of the securities 
of a registered unit investment trust for the securities of any other 
investment company, unless the terms of the offer have been approved by 
the SEC under section 11(a). Applicants submit that certain savings in 
sales related expenses involving repeat investors may appropriately be 
passed along to such investors, which savings will be recognized by a 
reduction in the sales charge of the Unit exchanged into. Applicants 
believe that whether the sales charge on the Unit exchanged is 
collected up-front or on a deferred basis in no way affects the nature 
of these savings.
    8. Applicants represent that unitholders will not be induced or 
encouraged to participate in the Exchange or Rollover Privilege through 
an active advertising or sales campaign. The Sponsor recognizes its 
responsibility to its customers against generating excessive 
commissions through churning and represents that the sales charge 
collected will not be a significant economic incentive to salesman to 
promote inappropriately the Exchange or Rollover Privilege. The Sponsor 
also believes that the operation and implementation of the DSC program 
will be adequately disclosed and explained to potential investors as 
well as unitholders.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Whenever the Exchange Privilege or Rollover Privilege is to be 
terminated or its terms are to be amended materially, any unitholder of 
a security subject to that privilege will be given prominent notice of 
the impending termination or amendment at least 60 days prior to the 
date of termination or the effective date of the amendment, provided 
that: (a) no such notice need be given if the only material effect of 
an amendment is to reduce or eliminate the sales charge payable at the 
time of an exchange, to add one or more new Series eligible for the 
Exchange Privilege or Rollover Privilege, or to delete a Series which 
has terminated; and (b) no notice need be given if, under extraordinary 
circumstances, either (i) there is a suspension of the redemption of 
Units of an Exchange Trust or Rollover Trust under section 22(e) of the 
Act and the rules and regulations promulgated thereunder, or (ii) an 
Exchange Trust or Rollover Trust temporarily delays or ceases the sale 
of its Units because it is unable to invest amounts effectively in 
accordance with applicable investment objectives, policies, and 
restrictions.
    2. An investor who purchases Units under the Exchange Privilege or 
Rollover Privilege will pay a lower sales charge than that which would 
be paid for the Units by a new investor. The reduced sales charge will 
be reasonably related to the expense of providing such service, and may 
include an amount that will fairly and adequately compensate the 
Sponsor.
    3. The prospectus of each Series and any sales literature or 
advertising that mentions the existence of the Exchange Privilege or 
the Rollover Privilege will disclose that the Exchange Privilege and 
the Rollover Privilege are subject to termination and that their terms 
are subject to change.
    4. Each Series offering Units subject to a DSC will include in its 
prospectus the table required by item 2 of Form N-1A (modified as 
appropriate to reflect the differences between unit investment trusts 
and open-end management investment companies) and a schedule setting 
forth the number and date of each installment payment.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-31150 Filed 12-6-96; 8:45 am]
BILLING CODE 6717-01-M