[Federal Register Volume 62, Number 73 (Wednesday, April 16, 1997)]
[Notices]
[Pages 18662-18665]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-9802]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 22612; 812-10400]


Smith Barney Inc., et al.; Notice of Application

April 9, 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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[[Page 18663]]

APPLICANTS: Smith Barney Incorporated (the ``Sponsor''); and Corporate 
Securities Trust, Directions Unit Investment Trust, Government 
Securities Trust, Harris Upham Tax Exempt Fund, E.F. Hutton Corporate 
Income Trust, E.F. Hutton Tax-Exempt Trust, E.F. Hutton Trust for 
Government Guaranteed Securities, Hutton Investment Trust, Hutton 
Telephone Trust, Hutton Utility Trust, Michigan Fund, Penn State Tax-
Exempt Investment Trust, Pennsylvania Fund, Smith Barney Shearson Unit 
Trusts, Tax-Exempt Municipal Trust, Tax Exempt Securities Trust, The 
Tax-Exempt Trust, The Uncommon Values Unit Trust, Equity Focus Trust, 
Angels With Dirty Faces Trust, The Countryfund Opportunity Trust (each 
an ``Existing Trust''); and any other future unit investment trust 
sponsored by the Sponsor (collectively, with the Existing Trusts, the 
``Trusts'').

RELEVANT ACT SECTIONS: Order requested pursuant to section 6(c) for 
exemptions from sections 2(a)(3), 2(a)(35), 22(d) and 26(a)(2) of the 
Act and rule 22c-1 thereunder, and pursuant to section 11(a) for an 
exemption from section 11(c).

SUMMARY OF APPLICATION: Applicants request an order to modify a 
condition to an existing order (the ``Prior Order'') \1\ and to permit 
the Trusts to impose sales charges on a deferred basis and waive the 
deferred sales charge in certain cases, exchange Trust units having 
deferred sales charges, and exchange units of a terminating series of a 
Trust for units of the next available series of that Trust.

    \1\ Investment Company Act Release Nos. 20296 (May 16, 1994) 
(notice) and 20344 (June 8, 1994) (order).
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FILING DATE: The application was filed on October 8, 1996, and amended 
on February 26, 1997.

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 on May 5, 1997 and 
should be accompanied by proof of service on applicants, in the form of 
an affidavit or, for lawyers, a certification 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, NW., Washington, DC 20549. 
Applicants, c/o Laurie A. Hesslein, Smith Barney Inc., 388 Greenwich 
Street, 23rd Floor, New York, NY 10013.

FOR FURTHER INFORMATION CONTACT:
Kathleen L. Knisely, Staff Attorney, at (202) 942-0517 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 is available for a fee from the 
SEC's Public Reference Branch.

Applicants' Representations

    1. Each of the Trusts is a unit investment trust registered or to 
be registered as an investment company under the Act and is sponsored 
or will be sponsored by the Sponsor. Each of the Trusts consists of one 
or more series of separate unit investment trusts issuing securities 
registered or to be registered under the Securities Act of 1933 (the 
``Series''). Applicants request that the relief sought herein apply to 
the Trusts and to future series of the 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 is then deposited 
with a trustee in exchange for certificates representing fractional 
undivided interests 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 market value of the underlying 
securities plus an up-front sales charge. The sales charge currently 
ranges from 1.50% to 4.70% of the public offering price, generally 
depending upon the terms of the underlying securities. The maximum 
charge is usually subject to reduction in compliance with rule 22d-1 
under the Act under certain stated circumstances disclosed in the 
prospectus, such as for a volume discount purchase.
    3. Applicants seek exemptive relief to permit payment of the sales 
charge for Units of any Series of any of the Trusts to be made on a 
deferred basis (the ``deferred sales charge'' or ``DSC''). The Sponsor 
will determine the maximum amount of the sales charge per Unit, and 
this maximum amount will be stated in the prospectus for the applicable 
Series. The Sponsor will have the flexibility to defer the collection 
of all or part of the sales charge initially determined as described 
above over a period (the ``Collection Period'') subsequent to the 
settlement date for the purchase of Units, provided that the Sponsor 
will in no event add to the deferred amount of the sales charge 
determined as described above any additional amount for interest or any 
similar or related charge to reflect or adjust for in any way any 
``time-value of money'' calculation related to such deferral. 
Applicants also intend to offer certain scheduled variations to the 
deferred sales charge such as volume discounts and waivers under 
certain circumstances.
    4. The Sponsor presently anticipates collecting a portion of the 
total sales charge ``up front,'' i.e., immediately upon purchase of 
Trust Units. The outstanding balance of the sales charge per Trust Unit 
as of the initial date of deposit will be collected over the remaining 
collection Period relevant to each particular Trust Series.
    5. The amount of the DSC per Unit as of the initial date of deposit 
will be stated in the prospectus as a dollar amount and/or as a 
percentage. The table required by item 2 of Form N-1A (modified as 
appropriate to reflect the difference between unit investment trusts 
and open-end management investment companies) and a schedule setting 
forth the number and date of each installment payment will be included 
in the prospectus. The duration of the Collection Period shall also be 
stated in such prospectus.
    6. A ratable portion of the sales charge remaining to be collected 
will be deducted (``Distribution Deductions'') from income 
distributions on the Units, from amounts received on the maturity or 
sale of securities or from a combination thereof, or may be paid by the 
Series on a periodic basis. Such payment amounts may be advanced by the 
trustee, who will be reimbursed from the income account of the Series 
(the ``Income Account'') or from the capital or principal account of 
the Series (the ``Capital Account'') upon the receipt of the proceeds 
from the maturity or sale of securities, until the total amount per 
Unit is collected, or deducted from the proceeds of sale, exchange, 
redemption or termination. The total of all these amounts will not 
exceed the sales charge per Unit. The DSC may be paid out of the Income 
or Capital Accounts of the Series and securities may be sold in order 
to pay any portion of the DSC due on a certain date in the event that 
income is insufficient to pay any amount due on such date.
    7. The Sponsor intends to deduct any amount of the unpaid DSC 
expense from the proceeds of any redemption of Units

[[Page 18664]]

or of any sale of Units to the Sponsor. In general, if the Sponsor were 
to impose a DSC on the redemption or sale of Units, a determination 
would be made as to whether a DSC applies to a particular redemption or 
sale of Units. For such purposes, it will be assumed that Units owned 
by a particular investor on which the total aggregate of Distribution 
Deductions have been collected (and therefore for which no DSC is due) 
are liquidated first. Any Units disposed of 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 by such investor are redeemed 
first.
    8. The Sponsor may adopt a procedure of waiving the DSC payable out 
of net sales or redemption proceeds under certain circumstances which 
will be disclosed in the current prospectus for each Series of Trust 
affected. Any such waiver of the DSC will be implemented in accordance 
with the provisions of rule 22d-1.
    9. Applicants' Prior Order permits the applicants to: (a) make 
certain exchange offers between specified funds (the ``Exchange 
Privilege''); (b) make certain exchange offers to holders of any 
registered unit investment trust carrying a specified sales load (the 
``Conversion Privilege''); and (c) publicly offer units of the trusts 
without previously privately placing at least $100,000 of units. Under 
the Prior Order, applicants may charge a sales charge at the time of 
the exchange or conversion not to exceed 1.5% of the unit being 
acquired on each exchange. Applicants seek to modify a condition to the 
Prior Order to permit exchanges and conversions of Units of Series at a 
reduced, as opposed to specified, sales charge (the ``Revised Exchange 
and Conversion Privilege'').
    10. Applicants also propose to offer a rollover privilege (the 
``Rollover Privilege'') which would allow holders the ability to roll 
over any or all of their Units in a Series which is terminating (the 
``Terminating Trust'') for Units in one or more new Series (the 
``Rollover Trust'') at a reduced sales charge. The Revised Exchange and 
Conversion Privilege and Rollover Privilege would extend to all 
exchanges, conversions, and rollovers of Units sold either with a fixed 
sales charge or with a DSC for Units of one or more Series (``Exchange 
Trust'' or ``Conversion Trust'') or Rollover Trust sold either with a 
fixed sales charge or with a DSC.
    11. A holder must notify the Sponsor of this desire to exercise his 
Rollover Privilege. Exercise of the Rollover Privilege is subject to 
the following conditions: (i) the Sponsor must be maintaining a 
secondary market in the Units of the available Rollover Trust, (ii) at 
the time of the Holder's election to participate in the Rollover 
Privilege, there must also be Units of the Rollover Trust available for 
sale, and (iii) exchanges will be effected in whole Units only.
    12. Investors who purchase Units under the Revised Exchange and 
Conversion Privilege or Rollover Privilege will pay a lower sales 
charge than that which would be paid by a new investor. The applicable 
reduced sales charge will be applied when an investor exchanges or 
converts his Units within five months of his acquisition for Units of a 
Series with a lower sales charge. An adjustment would be made, however, 
if Units of any Series are exchanged or converted within five months of 
acquisition for Units of a Series with a higher sales charge. In such 
cases, the exchange or conversion fee will be the greater of (i) the 
applicable reduced sales charge or (ii) an amount which, together with 
the sales charge already paid on the Units being exchanged or 
converted, equals the normal sales charge on the Units of a Trust 
Series being acquired through such exchange or conversion. This method 
of determining the exchange fee will also be applied in the case where 
the exchange of Units is from a Series of a Trust which is terminating 
for Units of one or more new Series of such Trust.

Applicant's Legal Analysis

    1. Under section 6(c), the Commission may exempt any person or 
transaction from any provision of the Act if and to the extent that 
such exemption is necessary or appropriate in the pubic interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act.
    2. Section 2(a)(32) defines a ``redeemable security'' as any 
security, other than short term paper, under the terms of which the 
holders upon its presentation to the issuer or a person designated as 
the issuer, is entitled to receive approximately his proportionate 
share of the issuer's current net assets, or the cash equivalent 
thereof. Section 4(2) defines a unit investment trust as an investment 
company that issues only redeemable securities. Applicants submit that 
the imposition of the DSC would not cause the Units of the Trusts to 
fall outside the definition of redeemable securities in section 
2(a)(32) of the Act. In order to avoid uncertainty in this regard, 
however, applicants request an exemption from section 2(a)(32) to the 
extent necessary to permit implementation of the DSC under the proposed 
deferred sales charge program.
    3. Section 2(a)(35) defines the term ``sales load'' to be the 
difference between the sales price and that portion of the proceeds 
from its sale which is received and invested or held for investment by 
the depositor or trustee. Applicants submit that the DSC is within the 
section 2(a)(35) definition of sales load, but for the timing of the 
imposition of the charge. Applicants therefore request an exemption 
from section 2(a)(35) to the extent necessary to implement the proposed 
DSC.
    4. Section 22(c) and rule 22c-1 require 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 submit that, although the DSC will be deducted 
at the time of redemption or repurchase from the holder's proportionate 
liquidation proceeds, such deduction does not in any way affect the 
calculation of net asset value used to determine the redemption price 
for the Units. In order to avoid any possibility that questions might 
be raised regarding the applicability of rule 22c-1, applicants request 
an exemption from 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 dealers to sell any redeemable security issued by such 
investment company only at the current public offering price described 
in the investment company's prospectus. Sales loads were historically 
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 registered investment companies and principal underwriters and 
dealers thereof to sell any redeemable securities issued by such 
company with scheduled variations in its sales load, subject to certain 
conditions. In the interest of clarity, applicants request that 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) 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

[[Page 18665]]

raised as to the propriety of the trustee disbursing these charges to 
the Sponsor, applicants request an exemption from section 26(a)(2) to 
the extent necessary to permit the trustee to collect these deductions 
and disburse them to the Sponsor as contemplated by the deferred sales 
charge program.
    7. Section 11(c) prohibits any type of offers of exchange of the 
securities of a registered unit investment trusts for securities of any 
other investment company unless the terms of the offer have been 
approved by the SEC. Applicants assert 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 
maintain that the reduction in the sales charge paid for units of the 
Series exchanged into is consistent with the provisions of the Act 
whether the sales charge on the units exchanged into is collected up-
front and/or on a deferred basis.
    8. Applicants represent that holders will not be induced or 
encouraged to participate in the Revised Exchange and Conversion 
Privilege 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 salesmen to promote inappropriately the Revised 
Exchange and Conversion Privilege 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. Applicants agree that whenever the Revised Exchange and 
Conversion Privilege or Rollover Privilege is to be terminated or its 
terms are to be amended materially, any holder 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 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 Revised 
Exchange and Conversion Privilege or the 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, Conversion or Rollover Trust 
under section 22(e) of the Act and the rules and regulations 
promulgated thereunder, or (ii) an Exchange, Conversion 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 Revised Exchange and 
Conversion 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. Applicants agree that the prospectus of each Series and any 
sales literature or advertising that mentions the existence of the 
Revised Exchange and Conversion Privilege or the Rollover Privilege 
will disclose that they 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.
    5. Applicants agree to continue to comply with all of the 
conditions contained in the Prior Order, except that condition 2 of the 
Prior Order is amended by condition 2 above.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-9802 Filed 4-15-97; 8:45 am]
BILLING CODE 8010-01-M