[Federal Register Volume 63, Number 38 (Thursday, February 26, 1998)] [Notices] [Pages 9877-9879] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 98-4857] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Rel. No. IC-23032; 812-10856] Van Kampen American Capital Distributors, Inc., et al.; Notice of Application February 20, 1998. AGENCY: Securities and Exchange Commission (``SEC''). ACTION: Notice of application for an order under section 6(c) of the Investment Company Act of 1940 (the ``Act'') for an exemption from section 26(a)(2)(D) of the Act. ----------------------------------------------------------------------- SUMMARY OF APPLICATION: Applicants request an order that would permit certain unit investment trusts to deposit trust assets in the custody of foreign banks and securities depositories. APPLICANTS: Van Kampen American Capital Distributors, Inc. (the ``Sponsor''), and Van Kampen American Capital Equity Opportunity Trust (the ``Trust''). FILING DATES: The application was filed on November 3, 1997 and amended on February 18, 1998. HEARING OR NOTIFICATION OF HEARING: An order granting the application will be issued unless the SEC orders a hearing. [[Page 9878]] 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 March 17, 1998, 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, One Parkview Plaza, Oakbrook Terrace, Illinois 60181. FOR FURTHER INFORMATION CONTACT: J. Amanda Machen, Senior Counsel, at (202) 942-7120 or Nadya Roytblat, Assistant Director, 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, 450 Fifth Street, N.W., Washington, D.C. 20549 (tel. 202-942-8090). Applicant's Representations 1. The Sponsor, a wholly-owned indirect subsidiary of Morgan Stanley, Dean Witter, Discover & Co., specializes in the underwriting and distribution of unit investment trusts (``UITs'') and mutual funds. The Sponsor is also a broker-dealer registered under the Securities Exchange Act of 1934. 2. The Trust is registered under the Act and consists of several UITs registered or to be registered under the Securities Act of 1933 (``Series'' or ``Trust Series''). Each Series is created under the laws of the United States pursuant to a trust agreement that will contain information specific to that Trust Series and which will incorporate by reference a master trust indenture (the ``Indenture'') among the Sponsor, a financial institution that is a bank within the meaning of section 2(a)(5) of the Act and that satisfies the criteria of section 26(a) of the Act (the ``Trustee''), an evaluator and a supervisor. Applicants request that any order granted pursuant to the application extend to any future UIT sponsored by the Sponsor or an entity controlled by or under common control with the Sponsor (together with the Trust, the ``Trusts''). 3. Several Series have investment objectives that specify the investment of assets in non-United States securities. To date, the existing Trust Series that invest in foreign securities have been able to deposit those securities in the custody of a foreign branch of a U.S. bank or with the securities clearance and depository facilities operated by Morgan Guaranty Trust Company of New York, in its capacity as operator of the Euroclear System (``Euroclear''), or with Central de Livraison de Valeurs Mobilieres, S.A. (``Cedel''), under an exemptive order granted to the Series' Trustee, the Bank of New York.\1\ Applicants currently contemplate creating a Trust Series (the ``EAFE Trust'') that will invest in the twenty companies with the highest dividend yield selected from a subset of the Morgan Stanley Capital International Europe, Australasia, Far East Index. The EAFE Trust will invest in foreign securities traded in several countries (such as Australia, France and New Zealand) that either are not eligible for settlement through Euroclear or Cedel or for which those depositories are not used in the ordinary course of settling transactions in those securities. Applicants therefore request an order to permit the Trust Series to deposit investments, including foreign currencies, for which the primary market is outside the United States and such cash and cash equivalents as necessary to effect the Series' transactions in those investments (collectively, ``Foreign Investments''), with any foreign bank or securities depository that meets the requirements described below. --------------------------------------------------------------------------- \1\ Investment Company Act Release Nos. 20444 (August 5, 1994) (notice) and 20521 (August 31, 1994) (order). --------------------------------------------------------------------------- 4. Without the requested relief, purchases of certain foreign securities by the EAFE Trust require that the securities must be physically transported in certificate form for deposit with a foreign branch of a U.S. bank and then retransported and redeposited upon sale. The costs and risks of this process are borne by the Series. Applicants also represent that, increasingly, transactions in foreign securities must be settled by book entry through specified clearing systems with related depositories. In addition, certain countries by law or regulation mandate use of a particular depository as the only means of holding a security. In other markets, maintaining securities outside a depository is not consistent with prevailing custodial practices. In some markets, anticipated time delays, as well as the costs, of maintaining securities with the nearest branch of a qualified U.S. bank have led the Sponsor to determine not to invest in those securities. Applicants' Legal Analysis 1. Under sections 2(a)(5) and 26(a)(1) of the Act, the trustee of a UIT must be a bank that is subject to regulation by the U.S. government or one of the states. Section 26(a)(2)(D) also requires that the trust indenture provide that the trustee ``shall have possession of all securities and other property in which the funds of the trust are invested * * * and shall segregate and hold the same in trust * * * until distribution thereof to the security holders of the trust.'' Under these provisions, the only foreign entity that qualifies as a UIT custodian is an overseas branch of a U.S. bank. 2. Section 6(c) provides that the SEC may conditionally or unconditionally exempt any person, security, or transaction, or any class or classes of persons, securities or transactions, from any provision of the Act or any rule or regulation under the Act if, and to the extent that, the 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. 3. Rule 17f-5 under the Act governs the custody of assets of registered management investment companies overseas. Applicants seek an order under section 6(c) exempting them and any U.S. bank that acts as Trustee for any Trust Series from section 26(a)(2)(D) of the Act to the extent necessary to permit a Trustee to deposit Foreign Investments with an eligible foreign custodian as that term is defined in rule 17f- 5 under the Act (``Eligible Foreign Custodian''). Rule 17f-5 defines Eligible Foreign Custodian to include an entity incorporated or organized under the laws of a foreign country that is (i) a banking institution or trust company regulated as a bank or trust company by the foreign country's government or government agency or a majority- owned direct or indirect subsidiary of a U.S. bank or bank holding company; (ii) a securities depository or clearing agency that acts as a system for the central handling of securities or equivalent book- entries in the country that is regulated by a foreign financial regulatory authority; or (iii) a securities depository or clearing agency that acts as a transnational system for the handling of securities or equivalent book-entries. 4. Under the proposed arrangements, a Trust Series would comply with all of the requirements of rule 17f-5, except [[Page 9879]] that the Trustee would perform the duties that rule 17f-5 requires to be performed by a ``foreign custody manager.'' Rule 17f-5 defines ``Foreign Custody Manager'' as the board of directors of a management investment company or a person serving as the board's delegate. 5. Under the proposed arrangements, the Sponsor, in determining the composition of the Trust Series' portfolio, will evaluate the risks of a Trust Series' investing in a particular country. In making the foreign investment decisions, the Sponsor may seek and rely on the information and opinion of the Trustee who may have information and experience concerning the financial systems and practices of the particular foreign market. The risks associated with the investment, if material, will be disclosed in the Trust Series' prospectus. 6. Consistent with the requirements of rule 17f-5, the Trustee, as Foreign Custody Manager, will select an Eligible Foreign Custodian after determining that the Series's assets will be subject to reasonable care; that the foreign custody contract will provide reasonable care for the Series' assets; and after establishing a system to monitor the appropriateness of maintaining the Series' assets with the custodian. The Trustee will make these determinations according to the requirements of the rule. The Indenture will contain provisions under which the Trustee agrees to indemnify the Trust Series against the risk of loss of Trust Series assets held in accordance with the foreign custody contract. In addition, the Indenture will contain provisions under which the Trustee agrees to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of Trust Series assets would exercise, and to be liable to the Trust Series for any loss occurring as a result of the Trustee's failure to do so. 7. Applicants believe the Trustee can fulfill the duties of a Foreign Custody Manager under rule 17f-5 to select a foreign custodian and monitor the foreign custody arrangements. Applicants also assert that the Trustee will have the necessary expertise and generally be in the best position to make the determinations required by the rule. Applicants believe that permitting the use of Eligible Foreign Custodians by Trust Series would result in efficiencies, cost savings and enhanced liquidity of the Series' Foreign Investments. Applicants' Conditions Applicants agree that the order granting the requested relief shall be subject to the following conditions: 1. The Indenture will contain provisions under which the Trustee agrees to indemnify the Trust Series against the risk of loss of Trust Series assets held in accordance with the foreign custody contract. 2. The Indenture will contain provisions under which the Trustee agrees to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of Trust Series assets would exercise, and to be liable to the Trust Series for any loss occurring as a result of the Trustee's failure to do so. 3. The Indenture will contain provisions under which the Trustee agrees to perform all of the duties assigned by rule 17f-5, as now in effect or as it may be amended in the future, to the Foreign Custody Manager. A Trustee's duties under this condition will not be delegated. 4. The Trust Series' prospectus will contain such disclosure regarding foreign securities and foreign custody as is required for management investment companies by Forms N-1A and N-2. 5. The Trustee will maintain and keep current written records regarding the basis for the choice or continued use of each foreign custodian. These records will be preserved for a period of not less than six years from the end of the fiscal year in which the Trust Series was terminated, the first two years in an easily accessible place. The records will be available for inspection at the Trustee's main office during the Trustee's usual business hours, by unitholders and by the SEC or its staff. For the SEC, by the Division of Investment Management, under delegated authority. Margaret H. McFarland, Deputy Secretary. [FR Doc. 98-4857 Filed 2-25-98; 8:45 am] BILLING CODE 8010-01-M