[Federal Register Volume 63, Number 62 (Wednesday, April 1, 1998)]
[Notices]
[Pages 15901-15905]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-8477]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23086; 812-10984]
Donaldson, Lufkin & Jenrette Securities Corporation; Notice of
Application
March 26, 1998.
agency: Securities and Exchange Commission (``SEC'').
action: Notice of application for an order under section 12(d)(1)(J) of
the Investment Company Act of 1940 (the ``Act'') for an exemption from
section 12(d)(1) of the Act, under section 6(c) of the Act for an
exemption from section
[[Page 15902]]
14(a) of the Act, and under section 17(b) of the Act for an exemption
from section 17(a) of the Act.
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summary of application: Donaldson, Lufkin & Jenrette Securities
Corporation (``DLJ'') requests an order with respect to the Trust
Enhanced Dividend Securities (``TRENDS'') trusts and future trusts that
are substantially similar to the TRENDS trusts and for which DLJ will
serve as a principal underwriter (collectively, the ``Trusts'') that
would (i) permit other registered investment companies, and companies
excepted from the definition of investment company under sections
3(c)(1) and (c)(7) of the Act, to own a greater percentage of the total
outstanding voting stock (the ``Securities'') of any Trust than that
permitted by section 12(d)(1), (ii) exempt from Trusts from the initial
net worth requirements of section 14(a), and (iii) permit the Trusts to
purchase U.S. government securities from DLJ at the time of a Trust's
initial issuance of Securities.
filing dates: The application was filed on January 30, 1998, and
amended on March 24, 1998.
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 DLJ
with a copy of the request, personally or by mail. Hearing should be
received by the SEC by 5:30 p.m. on April 16, 1998, and should be
accompanied by proof of service on DLJ, 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
to the SEC's Secretary.
addresses: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. DLJ, 277 Park Avenue, New York, New York 10172.
for further information contact: Brian T. Hourihan, Senior Counsel, at
(202) 942-0526, 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, 450 Fifth Street, N.W., Washington,
D.C. 20549 (tel. (202) 942-8090).
Applicant's Representations
1. Each Trust will be limited-life, grantor trust registered under
the Act as a non-diversified, closed-end management investment company.
DLJ 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, (i)
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 (ii) 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 no affiliated with either the relevant Trust or DLJ. The
investment objective of each Trust will be to provide to each holder of
Securities (``Holder'') (i) current cash distributions from the
proceeds of any Treasuries, and (ii) participation in, or limited
exposure to, changes in the market value of the underlying Shares.
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\1\Initially, no Trust will hold Contracts relating to the
Shares of more than one issuer. However, if certain events specified
in the Contracts occur, such as the issuer of Shares spinning-off
securities of another issuer to the holders of the Shares, the Trust
may receive shares of more than one issuer at the termination of the
Contracts.
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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 of
the Shares, 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 the 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 of the Shares, as determined by the
terms of the Contracts, that is equal to the Holders pro rate 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.
\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 termination of each Trust.
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4. Securities issued by the Trusts will be listed on a national
securities exchange or traded 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. DLJ currently 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 a 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 as paying agent,
registrar, and transfer agent with respect to the Securities of each
Trust. The 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 DLJ or the bank.
6. The Trusts will be structured so that the trustees are not
authorized to sell the Contracts or Treasuries under any circumstances
or only upon the occurrence of a default under a Contract. The Trusts
will hold the Contracts until maturity or any earlier acceleration, 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, or the occurrence of certain other defaults
provided for in the Contract, the obligations of the counterparty under
the Contract will be accelerated and the available proceeds of the
Contract will be distributed to the Security Holders.
7. The trustees of each Trust will be selected initially by DLJ,
together with any other initial Holders, or by the grantors of the
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
[[Page 15903]]
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 (i) 67% of the Securities represented at a meeting at
which more than 50% of the outstanding Securities are represented,
and (ii) more than 50% of the outstanding Securities.
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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 time 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) until receipt by
them of the Shares at the time the Trust is liquidated.
9. Each Trust will be structured so that its organizational and
ongoing expenses will not be borne by the Holders, but rather, directly
or indirectly, by DLJ, 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 DLJ).
Applicant's Legal Analysis
A. Section 12(d)(1)
1. Section 12(d)(1)(A)(i) of the Act prohibits (i) any registered
investment company from owning in the aggregate more than 3% of the
total outstanding voting stock of any other investment company, and
(ii) any investment company from owning in the aggregate more than 3%
of the total outstanding voting stock of any registered investment
company. A company that is excepted from the definition of investment
company under section 3(c)(1) or (c)(7) of the Act is deemed to be an
investment company for purposes of section 12(d)(1)(A)(i) of the Act
under sections 3(c)(1) and (c)(7)(D) of the Act. 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, the exemption is consistent with the public
interest and protection of investors.
3. DLJ believes, in order for the Trusts 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. DLJ states that these investors seek to spread the fixed
costs of analyzing specific investment opportunities by making sizable
investments in those opportunities. Conversely, DLJ asserts that it may
not be economically rational for the investors, or their advisers, to
take the time to review an investment opportunity if the amount that
the investors would ultimately be permitted to purchase is immaterial
in light of the total assets of the investment company or investment
company complex. Therefore, DLJ argues that these investors should 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). DLJ requests that
the SEC issue an order under section 12(d)(1)(J) exempting the Trusts
from the limitations.
4. DLJ states that section 12(d)(1) was designed to prevent one
investment company from buying control of other investment companies
and creating complicated pyramidal structures. DLJ also states that
section 12(d)(1) was intended to address the layering of costs to
investors.
5. DLJ believes that the concerns about pyramiding and undue
influence generally do 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, DLJ argues that any concerns regarding undue influence will be
eliminated by a provision in the charter documents of the Trusts that
will require 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) to vote their Securities in proportion to the votes of all
other Holders. DLJ also believes that the concern about undue influence
through a threat to redeem does not arise in the case of the Trusts
because the Securities will not be redeemable.
6. Section 12(d)(1) also was designed to address the excessive
costs and fees that may result from multiple layers of investment
companies. DLJ believes that these concerns do not arise in the case of
the Trusts because of the limited ongoing fees and expenses incurred by
the Trusts and because generally these fees and expenses will be borne,
directly or indirectly, by DLJ 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. DLJ asserts that the 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 DLJ, the
counterparties, or other third parties. Thus, a Holder will not pay
duplicative charges to purchase securities in any Trust. Finally, there
will be no duplication of advisory fees because the Trusts will be
internally managed by their trustees.
7. DLJ believes 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, DLJ assets that the Securities
are intended to provide Holders with an investment having unique
payment and risk characteristics, including an anticipated higher
current yield than the ordinary dividend yield on the Shares at the
time of the issuance of the Securities.
8. DLJ believes that the purposes and policies of 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
[[Page 15904]]
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. 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.
2. DLJ argues that, while the Trusts are classified as management
companies, they have the characteristics of unit investment trusts.
Investors in the Trusts, like investors in a 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.
DLJ believes 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. DLJ states 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, 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, DLJ states 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. DLJ also does 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, 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. DLJ requests that the SEC issue an order
under section 6(c) exempting the Trusts from the requirements of
section 14(a). DLJ believes that the 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 (2) of the Act generally prohibit the
principal underwriter, or any affiliated person of the principal
underwriter, of a registered 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 DLJ.
2. Section 17(b) of the Act provides that the SEC shall exempt a
proposed transaction from section 17(a) if evidence establishes that
the terms of the proposed transaction are reasonable and fair and do
not involve overreaching, and the proposed transaction is consistent
with the policies of the registered investment company involved and the
purposes of the Act. DLJ requests an exemption from sections 17(a) (1)
and (2) to permit the Trusts to purchase Treasuries from DLJ.
3. DLJ states that the policy rationale underlying section 17(a) is
the concern that an affiliated person of an investment company, by
virtue of this relationship, could cause the investment company to
purchase securities of poor quality from the affiliated person or to
overpay for securities. DLJ argues that it is unlikely that it 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. DLJ argues that because it is one of a limited
number of primary dealers in Treasuries, it will be able to offer the
Trusts prompt execution of their Treasury purchases at very competitive
prices.
4. DLJ states that it is only seeking relief from section 17(a)
with respect to the initial purchase of the Treasuries and not with
respect to an ongoing course of business. Consequently, investors will
know before they purchase a Trust's Securities the Treasuries that will
be owned by the Trust and the amount of the cash payments that will be
provided periodically by the Treasuries to the Trust and distributed to
Holders. DLJ also asserts that whatever risk there is of overpricing
the Treasuries will be borne by the counterparties and not by the
Holders because the cost of the Treasuries will be calculated into the
amount paid on the Contracts. DLJ argues 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. DLJ believes 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.
Applicant's Conditions
DLJ agrees 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, or will undertake, 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, (i) will adopt procedures
that are reasonably designated to provide that the conditions set forth
below have been complied with; (i) will make and approve such changes
as are deemed necessary; and (iii) will determine that the transactions
made pursuant to the order were effected in compliance with such
procedures.
3. The Trusts (i) will maintain and preserve in an easily
accessible place a written copy of the procedures (and any
modifications to the procedures), and (ii) will maintain and preserve
for the longer of (a) the life of the Trusts and (b) 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 DLJ, 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.
[[Page 15905]]
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 of the Trust on
the part of any person concerned.
6. The fee, spread, or other renumeration to be received by DLJ
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 are at least as favorable as that available from other
sources. This will 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 Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-8477 Filed 3-31-98; 8:45 am]
BILLING CODE 8010-01-M