[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]


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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.

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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.
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    \1\ Investment Company Act Release Nos. 20444 (August 5, 1994) 
(notice) and 20521 (August 31, 1994) (order).
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    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