[Federal Register Volume 62, Number 145 (Tuesday, July 29, 1997)]
[Notices]
[Pages 40556-40559]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19836]


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SECURITIES AND EXCHANGE COMMISSION

[Rel No. IC-22758; 812-10626]


Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill 
Lynch Government Securities, Inc.; Notice of Application

July 22, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for an order under the Investment Company 
Act of 1940 (the ``Act'').

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APPLICANTS: Merrill Lynch, Pierce, Fenner & Smith Incorporated 
(``Merrill Lynch'') and Merrill Lynch Government Securities, Inc. 
(``GSI'').

RELAVANT ACT SECTIONS: Order requested under section 12(d)(1)(J) for an 
exemption from section 12(d)(1), under section 6(c) for an exemption 
from section 14(a), and under section 17(b) for an exemption from 
section 17(a).

SUMMARY OF APPLICATION: Applicants request an order with respect to 
Structured Yield Product Exchangeable for Stock Trusts and future 
trusts that are substantially similar and for which Merrill Lynch will 
serve as a principal underwriter (the ``Trusts'') that would (a) permit 
other registered investment companies to own a greater percentage of 
the total outstanding voting stock (the ``Securities'') of any Trust 
than that permitted by section 12(d)(1), (b) exempt the Trusts from the 
initial net worth requirements of section 14(a), and (c) permit the 
Trusts to purchase U.S. government securities from Merrill Lynch and/or 
GSI at the time of a Trust's initial issuance of Securities.

FILING DATES: The application was filed on April 21, 1997, and amended 
on July 18, 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 heari8ng 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 August 15, 1997, 
and should be accompanied by proof of service on applicants, 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 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, World Financial Center, North Tower, 250 Vesey 
Street, New York, New York 10281-1318.

FOR FURTHER INFORMATION CONTACT: Brian T. Hourihan, Senior Counsel, at 
(202) 942-05267, or Mary Kay Frech, 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 from 
the SEC's Public Reference Branch.

Applicants' Representations

    1. Each Trust will be a limited-life, grantor trust registered 
under the Act as a non-diversified, closed-end management investment 
company. Merrill Lynch will serve as a principal underwriter (as 
defined in section 2(a)(29) of the Act) of the Securities issued to the 
public by each Trust.
    2. Each Trust will, at the time of its issuance of Securities, (a) 
enter into one or more forward purchase contracts (the ``Contracts'') 
with a counterparty to purchase a formulaically-determined number of a 
specified equity security or securities (the ``Shares'') of one 
specified issuer,\1\ and (b) in some cases, purchase certain U.S. 
Treasury securities (``Treasuries''), which may include interest-only 
or principal-only securities maturing at or prior to the Trust's 
termination. The Trusts will purchase the Contracts from counterparties 
that are not affiliated with either the relevant Trust or applicants. 
The investment objective of each Trust will be to provide to each 
holder of Securities (``Holder'') (a) current cash distributions from 
the proceeds of any Treasuries, and (b) participation in, or limited 
exposure to, changes in the market value of the underlying Shares.
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    \1\ No Trust will hold Contracts relating to the Shares of more 
than one issuer. (p.5, n.3)
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    3. In all cases, the Shares will trade in the secondary market and 
the issuer of the Shares will be a reporting company under the 
Securities Exchange Act of 1934. The number of Shares, or the value 
thereof, that will be delivered to a Trust pursuant to the Contracts 
may be fixed (e.g., one Share per Security issued) or may be determined 
pursuant to a formula, the product of which will vary with the price of 
the Shares. A formula generally will result in each Holder of 
Securities receiving fewer Shares as the market value of such Shares 
increases, and more Shares as their market value decreases.\2\ At the 
termination of each Trust, each Holder will receive the number of 
Shares per Security, or the value thereof, as determined by the terms 
of the Contracts, that is equal to the Holder's pro rata interest in 
the Shares or amount received by the Trust under the Contracts.\3\
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    \2\ A formula is likely to limit the Holder's participation in 
any appreciation of the underlying Shares, and it may, in some 
cases, limit the Holder's exposure to any depreciation in the 
underlying Shares. It is anticipated that the Holders will receive a 
yield greater than the ordinary dividend yield on the Shares at the 
time of the issuance of the Securities, which is intended to 
compensate Holders for the limit on the Holders' participation in 
any appreciation of the underlying Shares. In some cases, there may 
be an upper limit on the value of the Shares that a Holder will 
ultimately receive. (p.6)
    \3\ The contracts may provide for an option on the part of a 
counterparty to deliver Shares, cash, or a combination of Shares and 
cash to the Trust at the terminaiton of each Trust. (p.7, n.5)
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    4. Securities issued by the Trusts will be listed on a national 
securities exchange or trade on the National Association of Securities 
Dealers Automated Quotation System. Thus, the Securities will be 
``national market system'' securities subject to public price quotation 
and trade reporting requirements. After the Securities are issued, the 
trading price of the Securities is expected to vary from time to time 
based primarily upon the price of the underlying Shares, interest 
rates, and other factors affecting conditions and prices in the debt 
and equity markets. Mrerrill Lynch currently

[[Page 40557]]

intends, but will not be obligated, to make a market in the Securities 
of each Trust.
    5. Each Trust will be internally managed by three trustees and will 
not have any separate investment adviser. The trustees will have no 
power to vary the investments held by each Trust. A bank qualified to 
serve as a trustee under the Trust Indenture Act of 1939, as amended, 
will act as custodian for each Trust's assets and a paying agent, 
registrar, and transfer agent with respect to the Securities of each 
Trust. Such bank will have no other affiliation with, and will not be 
engaged in any other transaction with, any Trust. The day-to-day 
administration of each Trust will be carried out by Merrill Lynch or 
such bank.
    6. The Trusts will be structured so that the trustees are not 
authorized to sell the Contracts or Treasuries under any circumstances. 
The Trusts will hold such Contracts until maturity, at which time they 
will be settled according to their terms. However, in the event of the 
bankruptcy or insolvency of any counterparty to a Contract with a 
Trust, the obligations of such counterparty under the Contract will be 
accelerated and the available proceeds thereof will be distributed to 
the Security Holders.
    7. The trustees of each Trust will be selected initially by Merrill 
Lynch, together with any other initial Holders, or by the grantors of 
such Trust. The Holders of each Trust will have the right, upon the 
declaration in writing or vote of more than two-thirds of the 
outstanding Securities of the Trust, to remove a trustee. Holders will 
be entitled to a full vote for each Security held on all matters to be 
voted on by Holders and will not be able to cumulate their votes in the 
election of trustees. The investment objectives and policies of each 
Trust may be changed only with the approval of a ``majority of the 
Trust's outstanding Securities'' \4\ or any greater number required by 
the Trust's constituent documents. Unless Holders so request, it is not 
expected that the Trusts will hold any meetings of Holders, or that 
Holders will ever vote.
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    \4\ A ``majority of the Trust's outstanding Securities'' means 
the lesser of (a) 67% of the Securities represented at a meeting at 
which more than 50% of the outstanding Securities are represented, 
and (b) more than 50% of the outstanding Securities. (p. 10)
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    8. The Trusts will not be entitled to any rights with respect to 
the Shares until any Contracts requiring delivery of the Shares to the 
Trust are settled, at which the Shares will be promptly distributed to 
Holders. The Holders, therefore, will not be entitled to any rights 
with respect to the Shares (including voting rights or the right to 
receive any dividends or other distributions in respect thereof) until 
receipt by them of the Shares at the time the Trust is liquidated.
    9. Each Trust will be structed so that its organizational and 
ongoing expenses will not be borne by the Holders, but rather, directly 
or indirectly, by Merrill Lynch, the counterparties, or another third 
party, as will be described in the prospectus for the relevant Trust. 
At the time of the original issuance of the Securities of any Trust, 
there will be paid to each of the administrator, the custodian, and the 
paying agent, and to each trustee, a one-time amount in respect of such 
agent's fee over its term. Any expenses of the Trust in excess of this 
anticipated amount will be paid as incurred by a party other than the 
Trust itself (which party may be Merrill Lynch).

Applicants' Legal Analysis

A. Section 12(d)(1)

    1. Section 12(d)(1)(A)(i) of the Act prohibits any registered 
investment company from owning more than 3% of the total outstanding 
voting stock of any other investment company. Section 12(d)(1)(C) of 
the Act similarly prohibits any investment company, other investment 
companies having the same investment adviser, and companies controlled 
by such investment companies from owning more than 10% of the total 
outstanding voting stock of any closed-end investment company.
    2. Section 12(d)(1)(J) of the Act provides that the SEC may exempt 
persons or transactions from any provision of section 12(d)(1), if, and 
to the extent that, such exemption is consistent with the public 
interest and protection of investors.
    3. Applicants believe, in order for the Trust to be marketed most 
successfully, and to be traded at a price that most accurately reflects 
their value, that it is necessary for the Securities of each Trust to 
be offered to large investment companies and investment company 
complexes. Applicants state that large investment companies and 
investment company complexes seek to spread the fixed costs of 
analyzing specific investment opportunities by making sizable 
investments in those opportunities that prove attractive. Conversely, 
it may not be economically rational for such investors, or their 
advisers, to take the time to review an investment opportunity if the 
amount that they would ultimately be permitted to purchase is 
immaterial in light of the total assets of the investment company or 
investment company complex. Therefore, applicants argue that, in order 
for the Trusts to be economically attractive to large investment 
companies and investments company complexes, such investors must be 
able to acquire Securities in each Trust in excess of the limitations 
imposed by sections 12(d)(1)(A)(i) and 12(d)(1)(C). Applicants request 
that the SEC issue an order under section 12(d)(1)(J) exempting the 
Trusts from such limitations.
    4. Applicants state that section 12(d)(1) was enacted in order to 
prevent one investment company from buying control of other investment 
companies and creating complicated pyramidal structures. Applicants 
also state that section 12(d)(1) was intended to address two principal 
categories of problems: those associated with the ``pyramiding'' of 
control over portfolio funds by fund-holding companies and the 
layering-on of costs to investors.
    5. The pyramiding concerns fall into two categories. One arises 
from the potential for undue influence resulting from the pyramiding of 
voting control of the acquired investment company. Applicants believe 
that this concern generally does not arise in the case of the Trusts 
because neither the trustees nor the Holders will have the power to 
vary the investments held by each Trust or to acquire or dispose of the 
assets of the Trusts. To the extent that Holders can change the 
composition of the board of trustees or the fundamental policies of 
each Trust by vote, applicants argue that any concerns regarding undue 
influence will be eliminated by including a provision in the charter 
documents for the Trusts that will require that any investment 
companies owning voting stock of any trust in excess of the limits 
imposed by sections 12(d)(1)(A)(i) and 12(d)(1)(C) will vote their 
Securities in proportion to the votes of all other Holders.
    6. The second concern with respect to pyramiding is that an 
acquiring investment company might be able to influence unduly the 
persons operating the acquired investment fund. This undue influence 
could arise through a threat to redeem assets invested in the 
underlying fund at a time, or in a manner, which is disadvantageous to 
that fund, or to threaten to vote shares in that fund in a manner 
inconsistent with the best interests of that fund and its shareholders. 
Applicants believe that this concern does not arise in the case of the 
Trusts because the Securities will not be redeemable and because the 
trustees' management control will be so limited.

[[Page 40558]]

    7. The second major objective of section 12(d)(1) is to avoid 
imposing on investors the excessive costs and fees that may result from 
multiple layers of investments. Excessive costs can result from 
investors paying double sales charges when purchasing shares of a fund 
which, in turn, invests in other funds, or from duplicative expenses 
arising from the operation of two funds in place of one. Applicants 
believe that neither of these concerns arises in the case of the Trusts 
because of the limited on-going fees and expenses incurred by the 
Trusts and the fact that generally such fees and expenses will be 
borne, directly or indirectly, by Merrill Lynch or another third party, 
not by the Holders. In addition, the Holders will not, as a practical 
matter, bear the organizational expenses (including underwriting 
expenses) of the Trusts. Applicants assert that such organizational 
expenses effectively will be borne by the counterparties in the form of 
a discount in the price paid to them for the Contracts, or will be 
borne directly by Merrill Lynch, the counterparties, or other third 
parties. Thus, a Holder will not pay duplicative charges to purchase 
its investment in any Trust. Finally, there will be no duplication of 
advisory fees because the Trusts will be internally managed by their 
trustees.
    8. Applicants believe that the investment product offered by the 
Trusts serves a valid business purpose. The Trusts, unlike most 
registered investment companies, are not marketed to provide investors 
with either professional investment asset management or the benefits of 
investment in a diversified pool of assets. Rather, applicants assert 
that the Securities are intended to provide Holders with a security 
having unique payment and risk characteristics, including an 
anticipated higher yield than the ordinary dividend yield on the Shares 
at the time of the issuance of the Securities.
    9. Applicants believe that the purposes and policies of the section 
12(d)(1) are not implicated by the Trusts and that the requested 
exemption from section 12(d)(1) is consistent with the public interest 
and the protection of investors.

B. Section 14(a)

    1. Section 14(a) of the Act requires, in pertinent part, that an 
investment company have a net worth of at least $100,000 before making 
any public offering of its shares. The purpose of section 14(a) is to 
ensure that investment companies are adequately capitalized prior to or 
simultaneously with the sale of their securities to the public. Rule 
14a-3 exempts from section 14(a) unit investment trusts that meet 
certain conditions in recognition of the fact that, once the units are 
sold, a unit investment trust requires much less commitment on the part 
of the sponsor than does a management investment company.
    2. Applicants argue that, while the Trusts are classified as 
management companies, they have the characteristics of unit investment 
trusts that are relevant to the rule 14a-3 exemption. Rule 14a-3 
provides that a unit investment trust investing in eligible trust 
securities shall be exempt from the net worth requirement, provided 
that the trust holds at least $100,000 of eligible trust securities at 
the commencement of a public offering. Investors in the Trusts, like 
investors in a traditional unit investment trust, will not be 
purchasing interests in a managed pool of securities, but rather in a 
fixed and disclosed portfolio that is held until maturity. Applicants 
believe that the make-up of each Trust's assets, therefore, will be 
``locked-in'' for the life of the portfolio, and there is no need for 
an ongoing commitment on the part of the underwriter.
    3. Applicants state that, in order to ensure that each Trust will 
become a going concern, the Securities of each Trust will be publicly 
offered in a firm commitment underwriting, registered under the 
Securities Act of 1933, and resulting in net proceeds to each Trust of 
at least $10,000,000. Prior to the issuance and delivery of the 
Securities of each Trust to the underwriters, the underwriters will 
enter into an underwriting agreement pursuant to which they will agree 
to purchase the Securities subject to customary conditions to closing. 
The underwriters will not be entitled to purchase less than all of the 
Securities of each Trust. Accordingly, applicants state that either the 
offering will not be completed at all or each Trust will have a net 
worth substantially in excess of $100,000 on the date of the issuance 
of the Securities. Applicants also do not anticipate that the net worth 
of the Trusts will fall below $100,000 before they are terminated.
    4. Section 6(c) of the Act provides that the SEC may exempt persons 
or transactions if, and to the extent that, such exemption is necessary 
or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the Act. Applicants request that the SEC issue an 
order under section 6(c) exempting the Trusts from any requirements of 
section 14(a). Applicants believe that such exemption is appropriate in 
the public interest and consistent with the protection of investors and 
the policies and provisions of the Act.

C. Section 17(a)

    1. Sections 17(a)(1) and 17(a)(2) of the Act generally prohibit the 
principal underwriter, or any affiliated person of the principal 
underwriter, of any investment company from selling or purchasing any 
securities to or from that investment company. The result of these 
provisions is to preclude the Trusts from purchasing Treasuries from 
Merrill Lynch and/or GSI.
    2. Section 17(b) of the Act provides that the SEC shall exempt a 
proposed transaction from section 17(a) if evidence establishes that: 
(a) the terms of the proposed transaction are reasonable and fair and 
do not involve overreaching; (b) the proposed transaction is consistent 
with the policies of the registered investment company involved; and 
(c) the proposed transaction is consistent with the general purposes of 
the Act. Applicants request an exemption from sections 17(a)(1) and 
17(a)(2) to permit the Trusts to purchase Treasures from the 
applicants.
    3. Applicants state that the policy rationale underlying section 
17(a) is the concern that an affiliated person of an investment 
company, by virtue of such relationship, could cause an investment 
company to purchase securities of poor quality from the affiliated 
person or to overpay for any securities. Applicants argue that it is 
unlikely that Merrill Lynch or GSI would be able to exercise any 
adverse influence over the Trusts with respect to purchases of 
Treasuries because Treasuries do not vary in quality and are traded in 
one of the most liquid markets in the world. Treasuries are available 
through both primary and secondary dealers, making the Treasury market 
very competitive. In addition, market prices on Treasuries can be 
confirmed on a number of commercially available information screens. 
Applicants argue that because GSI is one of a limited number of primary 
dealers in Treasuries, the applicants will be able to offer the Trusts 
prompt execution of their Treasury purchases at very competitive 
prices.
    4. Applicants state that they are only seeking relief from section 
17(a) with respect to the initial purchase of the Treasuries and not 
with respect to an on-going course of business. Consequently, investors 
will know before they purchase a Trust's Securities the Treasuries that 
will be owned by the

[[Page 40559]]

Trust and the amount of the case payments that will be provided 
periodically by the Treasuries to the Trust and distributed to Holders. 
Applicants also assert that whatever risk there is of overpricing the 
Treasuries will be borne by the counterparts and not by the Holders 
because the costs of the Treasuries will be calculated into the amount 
paid on the Contracts. Applicants argue that, for this reason, the 
counterparties will have a strong incentive to monitor the price paid 
for the Treasuries, because any overpayment could result in a reduction 
in the amount that they would be paid on the Contracts.
    5. Applicants believe that the terms of the proposed transaction 
are reasonable and fair and do not involve overreaching on the part of 
any person, that the proposed transaction is consistent with the policy 
of each of the Trusts, and that the requested exemption is appropriate 
in the public interest and consistent with the protection of investors 
and purposes fairly intended by the policies and provisions of the Act.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. Any investment company owning voting stock of any Trust in 
excess of the limits imposed by section 12(d)(1) of the Act will be 
required by the Trust's charter documents to vote its Trust shares in 
proportion to the vote of all other Holders.
    2. The trustees of each Trust, including a majority of the trustees 
who are not interested persons of the Trust, (a) Will adopt procedures 
that are reasonably designed to provide that the conditions set forth 
below have been complied with; (b) will make and approve such changes 
as deemed necessary; and (c) will determine that the transactions made 
pursuant to the order were effected in compliance with such procedures.
    3. The Trusts (a) Will maintain and preserve in an easily 
accessible place a written copy of the procedures (and any 
modifications thereto), and (b) will maintain and preserve for the 
longer of (i) the life of the Trusts and (ii) six years following the 
purchase of any Treasuries, the first two years in an easily accessible 
place, a written record of all Treasuries purchased, whether or not 
from Merrill Lynch or GSI, setting forth a description of the 
Treasuries purchased, the identity of the seller, the terms of the 
purchase, and the information or materials upon which the 
determinations described below were made.
    4. The Treasuries to be purchased by each Trust will be sufficient 
to provide payments to Holders of Securities that are consistent with 
the investment objectives and policies of the Trust as recited in the 
Trust's registration statement and will be consistent with the 
interests of the Trust and the Holders of its Securities.
    5. The terms of the transactions will be reasonable and fair to the 
Holders of the Securities issued by each Trust and will not involve 
overreaching of the Trust or the Holders of Securities thereof on the 
part of any person concerned.
    6. The fee, spread, or other remuneration to be received by Merrill 
Lynch and/or GSI will be reasonable and fair compared to the fee, 
spread, or other remuneration received by dealers in connection with 
comparable transactions at such time, and will comply with section 
17(e)(2)(C) of the Act.
    7. Before any Treasuries are purchased by the Trust, the Trust must 
obtain such available market information as it deems necessary to 
determine that the price to be paid for, and the terms of the 
transaction is at least as favorable as that available from other 
sources. This shall include the Trust obtaining and documenting the 
competitive indications with respect to the specific proposed 
transaction from two other independent government securities dealers. 
Competitive quotation information must include price and settlement 
terms. These dealers must be those who, in the experience of the 
Trust's trustees, have demonstrated the consistent ability to provide 
professional execution of Treasury transactions at competitive market 
prices. They also must be those who are in a position to quote 
favorable prices.

    For the SEC, by the Division of Investment Management, pursuant 
to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 97-19836 Filed 7-28-97; 8:45 am]
BILLING CODE 8010-01-M