[Federal Register Volume 62, Number 13 (Tuesday, January 21, 1997)]
[Notices]
[Pages 3066-3068]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1360]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22465; 812-10404]


Liberty Term Trust, Inc.--1999; Notice of Application

January 14, 1997.
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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APPLICANT: Liberty Term Trust, Inc.--1999 (the ``Trust'').

RELEVANT ACT SECTIONS: Order requested under section 12(d)(1)(J) of the 
Act for an exemption from section 12(d)(1)(F)(ii) of the Act.

SUMMARY OF APPLICATION: Applicant requests an order that would exempt 
the Trust, a closed-end management investment company, from the 1.5% 
sales load limitation of section 12(d)(1)(F)(ii).

FILING DATE: The application was filed on October 17, 1996 and amended 
on November 21, 1996. Applicant has 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 
applicant with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on February 10, 
1997, and should be accompanied by proof of service on applicant, in 
the form of an affidavit or, for lawyers, a certificate of service. 
Hearing requests should state the nature of the writer's interest, the 
reason for the request, and the issues contested. Persons who wish to 
be notified of a hearing may request notification by writing to the 
SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicant: S. Elliott Cohan, Esq., Federated Investors Tower, 
Pittsburgh, PA 15222-3779.

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.

Applicant's Representations

    1. The Trust is registered under the Act as a diversified, closed-
end management investment company. Federated Advisers (the 
``Adviser''), a wholly-owned subsidiary of Federated Investors 
(``Federated''), serves as investment adviser to the Trust.
    2. The investment objective of the Trust is to return (i.e., 
provide a liquidating value equal to) at least $10 per share (the 
initial public offering price per share) to investors on or shortly 
before December 31, 1999, while providing high monthly income. The 
Trust seeks to return at least $10 per Share to investors on or shortly 
before December 31, 1999, by preserving capital through active 
management of its portfolio of high quality debt securities and through 
its investments in municipal securities, including municipal zero 
coupon securities. The Trust seeks to achieve high monthly income by 
investing in high quality debt securities--primarily mortgage-backed 
securities issued or guaranteed by the United States Government, its 
agencies, or instrumentalities--and by actively managing the Trust's 
assets in relation to market conditions, interest rate changes, and the 
remaining terms of the Trust.
    3. The Trust conducted its initial public offering in April 1992, 
pursuant to which the price of its shares (``Shares'') included 
underwriting discounts and commissions of 5.0%. The Trust's shares are 
traded on the New York Stock Exchange under the symbol ``LTT.'' As of 
November 8, 1996, the Trust had a net asset value per Share of $8.57 
and a per share closing price of $7\7/8\, reflecting a discount to net 
asset value of 8.1%. A combination of mortgage prepayments in 1993 and 
a bear market in fixed income securities in 1994 caused the Trust and 
other limited-life close-end investment

[[Page 3067]]

companies (``Term Trusts'') investing in mortgage-backed and other 
fixed incomes securities to realize significant losses. Although the 
Trust realized portfolio gains from the strong performance of the bond 
market during the second half of 1995, the Trust and the Adviser 
anticipate that the Trust may not fully recover previously realized 
losses. Accordingly, without some modifications to the Trust's current 
investment strategy, applicants believe that it will be difficult to 
provide a liquidating value of at least $10 per share to investors by 
December 1999. The Trust has taken a number of steps to improve the 
likelihood that it will be able to satisfy this portion of its 
investment objective, including open market repurchases of its shares, 
as permitted by section 23 of the Act. To argument these measures, the 
Trust wishes to have additional flexibility to invest a greater portion 
of its assets in securities issued by other closed-end management 
investment companies that (i) are trading at a discount to net asset 
value (``NAV''); (ii) are Term Trusts with similar investment 
objectives; and (iii) have undertaken to liquidate on or before 
December 31, 2002. In accordance with the Trust's investment 
restrictions and policies as set forth in its registration statement, 
the Trust proposes to allocate its assets among one or more such 
closed-end investment companies (each an ``Underlying Fund'' and 
collectively the ``Underlying Funds'') according to the following 
defined limits: (i) limit investment in the securities of any one 
Underlying Fund to not more than 3% of the total outstanding voting 
stock of such Underlying Fund; (ii) limit investment in the securities 
of any one Underlying Fund to not more than 25% of the value of the 
total assets of the Trust; and (iii) limit investment in the securities 
of all Underlying Funds to not more than 65% of the value of the total 
assets of the Trust.
    4. Because the Trust is obligated to liquidate and distribute cash 
to its shareholders in December 1999, the Adviser, as matter of prudent 
portfolio management, generally will invest Trust assets in securities 
with maturities consistent with the 1999 termination date. Accordingly, 
as the average maturity of the Trust's portfolio shortens, the 
opportunity to realize capital appreciation from fluctuations in the 
value of portfolio securities diminishes. Moreover, while a portion of 
the Trust's assets have been invested in zero coupon municipal 
securities which, over time, should increase in value through 
accretion, it is not expected that the Trust will experience a 
significant increase in NAV from these portfolio investments to offset 
previously realized portfolio losses. In order to bring the Trust's NAV 
per share closer to $10 over time, the Trust would like to invest a 
substantial portion of its assets in securities issued by other Term 
Trusts. Since the Trust will only be buying securities of closed-end 
investment companies that are trading at a discount from NAV, the Trust 
will realize a profit if and when the discount decreases or disappears. 
Furthermore, the Trust will only invest in securities issued by Term 
Trusts that have terms expiring on or before December 31, 2002, since 
the Adviser expects each Underlying Fund's discount to decrease due to 
market factors and/or as such fund's term nears its end. If the 
discount decreases for any of the Underlying Funds, the Trust will 
realize portfolio gains, thus resulting in an increase in its NAV.

Applicant's Legal Analysis

    1. Section 12(d)(1)(A) of the Act provides that no registered 
investment company may acquire securities issued by another investment 
company if such securities represent more than 3% of the total 
outstanding voting stock of the acquired company, more than 5% of the 
value of the total assets of the acquiring company, or if securities 
issued by the acquired company and all other investment companies have 
an aggregate value in excess of 10% of the value of the total assets of 
the acquiring company.
    2. Section 12(d)(1)(F) provides that section 12(d)(1) shall not 
apply to securities purchased or otherwise acquired by a registered 
investment company if immediately after the purchase or acquisition not 
more than 3% of the total outstanding stock of the acquired company is 
owned by the acquiring company and the acquiring company does not 
impose a sales load of more than 1.5% on its shares after January 1, 
1971. In addition, no acquired company is obligated to honor any 
acquiring company redemption request in excess of 1% of the acquired 
company's securities during any period of less than 30 days, and the 
acquiring company must vote its acquired company shares either in 
accordance with instructions from its shareholders or in the same 
proportion as all other shareholders of the acquired company. Because 
the Trust incurred underwriting discounts and commissions in excess of 
1.5% during its initial public offering, applicant seeks relief from 
the 1.5 during its initial public offering, applicant seeks relief from 
the 1.5% sales load limitation of section 12(d)(1)(F)(ii).
    3. Applicant states that section 12(d) of the Act is intended to 
prevent the unregulated pyramiding of investment companies and the 
negative effects which are perceived to arise from such pyramiding. 
Applicant submits that these abuses include (a) undue influence by a 
fund holding company over its underlying funds; (b) the threat of large 
scale redemptions of the securities of the underlying investment 
companies; (c) unnecessary duplication of costs (such as sales charges, 
advisory fees, and administrative costs); and (d) unnecessary 
complexity. Applicant asserts that the proposed arrangement will not 
give rise to these dangers.
    4. Applicant submits that the potential problems of pyramiding of 
voting control will be eliminated because, as a condition to the 
granting of the order, the Trust will comply with the requirements of 
section 12(d)(1)(F) (other than the sales load limitation therein), 
which requires the Trust to exercise voting rights with respect to any 
securities acquired in the manner prescribed by subsection (E) of 
section 12(d)(1). Subsection (E) requires that a fund holding company 
exercise voting rights in the portfolio securities only by passing them 
through to its security holders or voting such units in the same 
proportion as the vote of all other holders of the securities. 
Applicants believe that, under these conditions, orderly management of 
the Underlying Funds will not be threatened or disrupted.
    5. Applicant argues that the concern of large-scale redemptions is 
not present under the proposed arrangement for several reasons. First, 
applicant notes that the Trust will invest only in closed-end 
companies, which do not stand ready to redeem their units at net asset 
value as do open-end investment companies and are not required to have 
cash on hand to cover redemptions by unitholders. Therefore, applicant 
believes that there is no danger of large-scale redemptions and a 
resulting liquidity crisis with respect to closed-end investment 
companies. Moreover, applicant states that the Trust itself is a 
closed-end fund, so its liquidity needs will be minimal.
    6. With regard to layering of fees and expenses, applicant states 
that the Trust is an already existing closed-end fund, and therefore 
the concern of an excessive sales load is not present. Applicant 
submits that the Trust is seeking relief from the 1.5% sales load 
limitation of section 12(d)(1)(F) since the initial public offering of 
the Trust's shares, completed in April 1992,

[[Page 3068]]

included underwriting discounts and commissions of 5.0%. Applicant 
states that the initial public offering of the Shares was conducted in 
compliance with all applicable rules of the National Association of 
Securities Dealers, Inc. (``NASD''). Applicant note that, in 
particular, the underwriting terms and arrangements were reviewed and 
approved by the NASD pursuant to section 44 of Article III of the 
NASD's Rules of Fair Practice (recodified as rule 2740 of the Conduct 
Rules) governing corporate financing.
    7. Furthermore, applicant states that the Trust will only invest in 
securities issued by closed-end investment companies that are traded on 
the open market. Applicant states that therefore, no front-end sales 
loads, contingent deferred sales charges, 12b-1 fees, or other 
distribution fees or redemption fees will be charged in connection with 
the purchase or sale of any of the Underlying Funds by the Trust. 
Applicant states that, although the Trust will likely incur brokerage 
commissions in connection with its open market purchases of securities 
of closed-end investment companies, these commissions will not differ 
from commissions otherwise incurred in connection with the purchase or 
sale of comparable portfolio securities. In addition, applicant states 
that, by purchasing the securities of closed-end investment companies 
in the secondary market, the Trust avoids the payment of any 
underwriting spreads common during the initial offering of such shares.
    8. Applicant states that the Adviser would continue to charge the 
Trust an annual investment advisory fee in an amount equal to 0.45% of 
the average weekly net asset value of the Trust. Applicant states that 
such fee would be for services that are in addition to and not 
duplicative of the investment advisory services that are being 
furnished to the Underlying Funds. Applicant states that, the Adviser 
anticipates that it will devote significant resources to evaluating and 
monitoring individual portfolio securities, as well as the overall 
portfolio structure, of Term Trusts in which it invests or considers 
for investment, to ensure the appropriateness of such investments and 
their consistency with the Trust's investment objective. Thus, while 
shareholders of the Trust would indirectly bear their proportional 
share of the advisory fees and administrative expenses charged to the 
Underlying Funds, applicant does not believe that there would be the 
duplication of fees.
    9. Applicant believes that the concern about undue complexity is 
not present under the proposed arrangement because the Trust agrees, as 
a condition to relief, that it will not knowingly invest in any 
Underlying Fund that, at the time of acquisition, acquires securities 
of any other investment company in excess of the limits contained in 
section 12(d)(1)(A). Under this condition, applicant represents that it 
will determine whether a prospective Underlying Fund is a ``fund of 
funds'' at the time of acquisition. However, applicant states that, if 
an Underlying Fund subsequently acquires securities of other investment 
companies in excess of the limits of section 12(d)(1), the Trust will 
not be required to divest itself of its holdings. Applicant argues that 
because the Underlying Funds are unaffiliated with the Trust, the Trust 
cannot bind or control the Underlying Funds.
    10. Section 12(d)(1)(J) provides that the SEC may exempt any person 
or transaction from any provision of section 12(d)(1) if and to the 
extent such exemption is consistent with the public interest and the 
protection of investors. Applicant submits that, under the 
circumstances and conditions of the application, the requested 
exemption is in the public interest and consistent with the protection 
of investors.

Applicant's Conditions

    Applicant agrees that the order granting the requested relief shall 
be subject to the following conditions:
    1. The Trust will comply with section 12(d)(1)(F) in all respects 
except for the sales load limitation of section 12(d)(1)(F)(ii).
    2. The Trust will not knowingly acquire securities of an Underlying 
Fund which, at the time of acquisition, owns securities of any other 
investment company in excess of the limits contained in section 
12(d)(1)(A) of the Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-1360 Filed 1-17-97; 8:45 am]
BILLING CODE 8010-01-M