[Federal Register Volume 63, Number 72 (Wednesday, April 15, 1998)]
[Notices]
[Pages 18465-18468]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-9884]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23106; 812-10780]


Reich & Tang Distributors, Inc., et al.; Application

April 8, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``Act'').

-----------------------------------------------------------------------

SUMMARY OF APPLICATION: Applicants Reich & Tang Distributors, Inc. (the 
``Sponsor'') and Equity Series Trust, Asset Allocation Trust (Series 1 
and Subsequent Series) (the ``Trust'') request an order: (a) Under 
section 12(d)(1)(J) of the Act that would permit each series of

[[Page 18466]]

the Trust (``Trust Series'') to offer its shares to the public with a 
sales load that exceeds the 1.5% limit of section 12(d)(1)(F)(ii); (b) 
under sections 6(c) and 17(b) of the Act for an exemption from section 
17(a) of the Act to permit the Trust to invest in affiliated registered 
investment companies within the limits of section 12(d)(1)(F) of the 
Act; and (c) under section 6(c) of the Act for an exemption from 
sections 14(a) and 19(b) of the Act and rule 19b-1 under the Act to 
permit units of the Trust to be publicly offered without requiring the 
sponsor to take for its own account or place with others $100,000 worth 
of units in the Trust, and permit the Trust to distribute capital gains 
resulting from the sale of portfolio securities within a reasonable 
time after receipt.

FILING DATES: The application was filed on September 15, 1997 and 
amended on December 31, 1997. Applicants have agreed to file another 
amendment during the notice period, the substance of which is included 
in this notice.

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 
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 May 4, 1998 and 
should be accompanied by proof of service on the 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 who wish to be 
notified of a hearing may request notification by writing to the SEC's 
Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW, Washington, DC 20549. 
Applicants: c/o Peter J. DeMarco, Sponsor, 600 Fifth Avenue, New York, 
NY 10022.

FOR FURTHER INFORMATION CONTACT:
David W. Grim, Staff Attorney, at (202) 942-0571, or Nadya B. 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 from 
the SEC's Public Reference Branch (tel. 202-942-8090).

Applicants' Representations

    1. Each Trust Series will be a separate unit investment trust 
registered under the Act and organized under a trust indenture that 
will incorporate by reference a master trust agreement between the 
Sponsor and a qualified bank as trustee (the ``Trustee''). Pursuant to 
the trust agreement, the Sponsor will deposit into each Trust Series 
shares of a number of existing registered investment companies 
(``Funds''), or contracts and monies for the purchase of shares of such 
Funds. The portfolio of each Trust Series will consist exclusively of 
shares of Funds. Units of undivided interest in each Trust Series will 
be offered to investors typically in approximately $1, $10, or $1,000 
increments (``Units''). The Sponsor will serve as the sponsor and 
depositor for each Trust Series, and will perform functions typical of 
unit investment trust sponsors.
    2. The purpose of each Trust Series is to provide retail investors: 
(a) An investment with a professionally selected asset allocation model 
based upon the Sponsor's assessment of the overall economic climate and 
financial markets, and (b) the opportunity for capital appreciation 
through a diversified fixed portfolio of Funds professionally selected 
by the Sponsor from the available Funds within the various market 
sectors of the Sponsor's asset allocation model. Applicants anticipate 
that certain of the Funds selected may be advised and/or distributed by 
the Sponsor or one of its affiliates (``Affiliated Funds''). However, 
applicants anticipate that most of the Funds selected will be 
unaffiliated with the Sponsor (``Unaffiliated Funds''). Applicants 
state that the Trust's investments in Affiliated Funds and Unaffiliated 
Funds will comply with section 12(d)(1)(F) of the Act in all respects 
except for the sales load restriction in section 12(d)(1)(F)ii).
    3. The only Funds that will be eligible for inclusion in a Trust 
Series are either no load Funds or Funds which, although they offer 
shares with a front-end sales charge, agree to waive any otherwise 
applicable sales load with respect to all shares sold or deposited in 
any Trust Series. Shares of each of the Funds (except for closed-end 
Funds) will, therefore, be sold for deposit into any Trust Series at 
net asset value. Shares of closed-end Funds will be purchased by a 
Trust Series at market prices. Investors in the Trust (``Unitholders'') 
will pay a specified sales load to the Sponsor in connection with the 
purchase of their Units. Sales loads imposed on Units are expected to 
range from 2.00% to 5.25% of the public offering price of the Units, 
with the actual amount dependent upon the number of Units purchased and 
the specified term of the Trust Series.
    4. No evaluation fee will be charged with respect to determining 
the value of the Fund's shares that comprise the Trust's portfolio 
because shares of the Funds have their net asset values calculated 
daily, and these will be readily available to the Sponsor. The Trustee 
will receive service fees under a rule 12b-1 plan from the Funds to 
compensate it for providing servicing and sub-accounting functions with 
respect to Fund shares held by a Trust Series. The Trustee will reduce 
its regular fee to the Trust directly by the fees it receives from the 
Funds and rebate any excess fees it receives to the Trust. Any fees so 
rebated will be utilized by the Trust to absorb other bona fide Trust 
expenses. To the extent that these fees exceed the total Trust 
expenses, the excess will be distributed along with other income earned 
by the Trust.

Applicants' Legal Analysis

Section 12(d)(1) of the Act

    1. Section 12(d)(1)(A) of the Act provides that no registered 
investment company may acquire securities of another investment company 
if such securities represent more than 3% of the acquired company's 
outstanding voting stock, more than 5% of the acquiring company's total 
assets, or if such securities, together with the securities of any 
other acquired investment companies, represent more than 10% of the 
acquiring company's total assets.
    2. Section 12(d)(1)(F) of the Act provides that section 12(d)(1) 
does not apply to securities purchased or otherwise acquired by a 
registered investment company is immediately after the purchase or 
acquisition not more than 3% of the total outstanding stock of the 
acquired company is owned by the acquiring company and its affiliated 
persons and the acquiring company does not impose a sales load on its 
shares of more than 1.5%. In addition, no acquired company may be 
obligated to honor any acquiring company redemption request in excess 
of 1% of the acquired company's securities during any period of less 
than 30 days, and the acquiring company must vote its acquired company 
shares either in accordance with instructions from its shareholders or 
in the same proportion as all other shareholders of the acquired 
company.
    3. The Trust Series will invest in Affiliated and Unaffiliated 
Funds in reliance on section 12(d)(1)(F) of the Act. If the requested 
relief is granted, the Trust Series will offer Units to the

[[Page 18467]]

public with a sales load that exceeds the 1.5% limit in section 
12(d)(1)(F)(ii).
    4. Section 12(d)(1)(J) of the Act provides that the SEC may exempt 
any person or transaction from any provision of section 12(d)(1) if and 
to the extent that such exemption is consistent with the public 
interest and the protection of investors.
    5. Applicants state that investors in the Trust and subsequent 
series will pay a specified sales load, expected to range from 2.00% to 
5.25% of the public offering price of the Units, to the Sponsor in 
connection with the purchase of their Units. Applicants have agreed, as 
a condition to the relief, that any sales charges, distribution-related 
fees, and service fees relating to Units, when aggregated with any 
sales charges, distribution-related fees, and service fees paid by the 
Trust relating to its acquisition, holding, or disposition of shares of 
the Funds, will not exceed the limits set forth in rule 2830 of the 
NASD Conduct Rules. Applicants believe that it is appropriate to apply 
the NASD's Rule to the proposed arrangement in place of the sales load 
limitation in section 12(d)(1)(F) because the proposed limit would cap 
the aggregate sales charges of the Units and the underlying Funds, and 
because the proposed limit is consistent with the limit recently 
adopted in section 12(d)(1)(G) of the Act. Applicants assert that the 
NASD's specific sales charge rules more accurately reflect today's 
regulatory environment with respect to the methods by which investment 
companies finance sales expenses. Applicants contend that section 
12(d)(1)(F), on the other hand, was adopted more than a quarter of a 
century ago and does not reflect the changes in the pricing practices 
of the industry.
    6. Applicants state that, with respect to shares of closed-end 
Funds held by a Trust Series, no front-end sales loads, contingent 
deferred sales charges, rule 12b-1 fees, or other distribution fees or 
redemption fees will be charged in connection with the purchase or sale 
of these Funds by a Trust Series. Applicants state that, although the 
Trust Series likely will incur brokerage commissions in connection with 
its market purchases of shares of closed-end Funds, these commissions 
will not differ materially from commissions otherwise incurred in 
connection with the purchase or sale of comparable portfolio 
securities.
    7. Applicants also agree as a condition to the requested relief 
that no Trust Series will invest in any underlying Fund that acquires 
securities of any other investment company in excess of the limits 
contained in section 12(d)(1)(A) of the Act.

Section 17(a) of the Act

    1. With regard to Trust Series' investments in Affiliated Funds, 
applicants request relief from section 17(a) of the Act under sections 
6(c) and 17(b). Section 17(a) of the Act generally prohibits an 
affiliated person, or an affiliated person of an affiliated person, of 
a registered investment company from selling securities to, or 
purchasing securities from, the company.
    2. Section 6(c) of the Act provides that the SEC may exempt persons 
or transactions from any provision of the Act if 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. 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, including 
the consideration to be paid or received, 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.
    3. Applicants state that shares of Affiliated Funds will be sold to 
the Trust at net asset value, or, in the case of closed-end Funds, at 
market prices. As a result, applicants believe that the proposed terms 
and conditions of the Trust's transactions, including the consideration 
to be paid or received, will be reasonable and fair and will not 
involve overreaching on the part of any person involved. Furthermore, 
applicants believe that the proposed transactions will be consistent 
with the policies of the Trust as recited in its registration 
statement.

Section 14(a) of the Act

    1. Section 14(a) of the Act requires in substance that an 
investment company have $100,000 of net worth prior to making a public 
offering. Applicants believe that each Trust Series will comply with 
this requirement because the Sponsor will deposit substantially more 
than $100,000 of Fund shares in each Trust Series. Applicants assert, 
however, that a Trust Series would not satisfy section 14(a) because of 
the Sponsor's intention to sell all of its Units.
    2. Rule 14a-3 under the Act exempts unit investment trusts from 
section 14(a) if certain conditions are met, one of which is that the 
Trust invest only in ``eligible trust securities,'' as defined in the 
rule. Applicants submit that the Trust could not rely on the rule 
because Fund shares are not eligible trust securities. Consequently, 
applicants seek an exemption under section 6(c) from the net worth 
requirement of section 14(a). Applicants state that the Trust and the 
Sponsor will comply in all respects with the requirements of rule 14a-
3, except that the Trust will not restrict its portfolio investments to 
``eligible trust securities.''

Section 19(b) of the Act

    1. Section 19(b) of the Act and rule 19b-1 under the Act provide 
that, except under limited circumstances, no registered investment 
company may distribute long-term gains more than once every twelve 
months. Rule 19b-1(c), under certain circumstances, excepts a unit 
investment trust investing in ``eligible trust securities'' (as defined 
in rule 14a-3) from the requirements of rule 19b-1. Because the Trust 
does not limit its investments to ``eligible trust securities,'' the 
Trust does not qualify for the exemption in paragraph (c) of rule 19b-
1. Therefore, applicants request an exemption under section 6(c) from 
section 19(b) and rule 19b-1 to the extent necessary to permit capital 
gains earned in connection with the redemption of Fund shares to be 
distributed to Unitholders along with the Trust's regular 
distributions. Applicants state that, in all other respects, the Trust 
will comply with section 19(b) and rule 19b-1. Applicants assert that 
the abuses that section 19(b) and rule 19b-1 were designed to prevent 
do not arise with regard to the Trust. Applicants state that any gains 
from the redemption of Fund shares would be triggered by the need to 
meet Trust expenses or by requests to redeem Units, events over which 
the Sponsor and the Trust have no control.

Applicants' Conditions

    Applicants agree that the requested order will be subject to the 
following conditions:
    1. Each Trust Series will comply with section 12(d)(1)(F) in all 
respects except for the sales load limitation of section 
12(d)(1)(F)(ii).
    2. Any sales charges, distribution-related fees, and service fees 
relating to the Units, when aggregated with any sales charges, 
distribution-related fees, and service fees paid by the Trust relating 
to its acquisition, holding, or disposition of shares of the Funds, 
will not exceed the limits set forth in rule 2830 of the NASD Conduct 
Rules.
    3. No Fund will acquire securities of any other investment company 
in excess

[[Page 18468]]

of the limits contained in section 12(d)(1)(A) of the Act.
    4. The Trust and the Sponsor will comply in all respects with the 
requirements of rule 14a-3, except that the Trust will not restrict its 
portfolio investments to ``eligible trust securities.''
    5. No Trust Series will terminate within thirty days of the 
termination of any other Trust Series that holds shares of one or more 
common Funds.
    6. The prospectus of each Trust Series and any sales literature or 
advertising that mentions the existence of an in-kind distribution 
option will disclose that Unitholders who elect to receive Fund shares 
will incur any applicable rule 12b-1 fees.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-9884 Filed 4-14-98; 8:45 am]
BILLING CODE 8010-01-M