[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