[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