[Federal Register Volume 63, Number 135 (Wednesday, July 15, 1998)]
[Notices]
[Pages 38218-38219]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18842]


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SECURITIES AND EXCAHNGE COMMISSION

[Rel. No. IC-23308; 812-10008]


Corporate Income Fund, et al.; Notice of Application

July 9, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').

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

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SUMMARY OF APPLICATION: Applicants request an order under section 6(c) 
of the Investment Company Act of 1940 to permit certain unit investment 
trusts to invest up to 10.5% of their assets in securities of an issuer 
that derives more than 15% of its gross revenues from securities-
related activities.

APPLICANTS: Corporate Income Fund, Equity Income Fund, International 
Bond Fund, and Defined Asset Funds, each on behalf of its component 
unit investment trust (each a ``Trust'').

FILING DATES: The application was filed on February 22, 1996, and 
amended on July 10, 1996, January 13, 1997, and January 23, 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 
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 August 3, 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, DC 
20549. Applicants, c/o Merrill Lynch, Pierce, Fenner & Smith Inc., P.O. 
Box 9051, Princeton, N.J. 08543-9051, Attention: Teresa Koncick, Esq.

FOR FURTHER INFORMATION CONTACT:
Mary T. Geffroy, Senior Counsel, (202) 942-0553, or Nadya B. Roytblat, 
Assistant Director, (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 St. N.W., Washington, D.C. 
20549 (tel. (202) 942-8090).

Applicant's Representations

    1. Each applicant is a unit investment trust registered under the 
Act and composed of one or more separate Trusts. The depositors of the 
Trusts are Merrill Lynch, Pierce, Fenner & Smith Inc., PaineWebber 
Inc., Smith Barney Inc., and Dean Witter Reynolds Inc. (collectively, 
the ``Sponsors'').
    2. Each Trust pursues its investment objective by investing over 
its life in a fixed portfolio of securities. Following the initial 
deposit of securities in a Trust, the Sponsors may, in response to 
investor demand for units, deposit additional securities. Subsequent 
deposits of securities into the Trust must generally maintain the 
original proportionate relationship among the securities comprising the 
Trust's portfolio.
    3. Disposition of a Trust's portfolio securities is generally 
limited to sales made in response to redemptions of units and at the 
termination of the Trust. Other than these specific instances, the 
Sponsors' discretion to sell a Trust's portfolio securities is limited 
to narrow circumstances, principally: a default in payment by an 
issuer; the institution of certain legal proceedings; a default under 
certain documents adversely affecting the future declaration of 
dividends or payment of amounts due by an issuer; to maintain a Trust's 
qualification under the federal tax laws; to remain consistent with a 
Trust's investment objectives; or the occurrence of certain other 
market or credit factors that, in the opinion of the Sponsors, would 
make the retention of certain securities in a Trust detrimental to the 
interest of the unitholders.
    4. Applicants would like the flexibility to invest up to 10.5% of a 
Trust's assets in securities of an issuer that derives more than 15% of 
its gross revenues from securities-related activities (as defined 
below). No Trust will invest in securities issued by any of the 
Sponsors or other underwriters for the Trusts.

Applicants' Legal Analysis

    1. Section 12(d)(3) of the Act generally prohibits a registered 
investment company from acquiring any security issued by any person who 
is a broker, dealer, investment adviser, or engaged in the business of 
underwriting (collectively, ``securities-related activities''). Rule 
12d3-1 under the Act, in relevant part, exempts from the prohibition of 
section 12(d)(3) purchases of securities of an issuer that derives more 
than 15% of its gross revenues from securities-related activities if 
certain conditions are met. One of these conditions, set forth in rule 
12d3-1(b)(3), requires that, immediately after the acquisition, the 
investment company has invested not more than 5% of the value of its 
total assets in securities of the issuer.
    2. Applicants request an exemption from rule 12d3-1(b)(3) to permit 
a Trust to invest up to 10.5% of its assets in securities of an issuer 
that derives more than 15% of its gross revenues from securities-
related activities. Applicants will comply with all other requirements 
of rule 12d3-1.
    3. Section 6(c) of the Act provides that the SEC may exempt any 
person, security, or transaction from any provision of the Act if and 
to the extent that 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.
    4. Applicants state that section 12(d)(3) was designed to prevent 
certain potential conflicts of interest and to eliminate certain 
reciprocal practices between investment companies and securities-
related businesses. One potential abusive practice is that an

[[Page 38219]]

investment company may purchase shares of a broker-dealer firm to 
reward it for selling shares of the investment company.
    Applicants assert that their proposal does not raise this concern 
because units of the Trusts are sold almost exclusively by the Sponsors 
and the Trusts will not purchase shares of the Sponsors or other 
underwriters for the Trusts. The Sponsors estimate that, over the past 
year, both in the primary and secondary markets, over 99% of all unit 
sales for the Trusts were made by the Sponsors. Applicants also state 
that the balance of sales generally are made by a few regional 
brokerage firms as dealers, that these firms are not members of the 
underwriting group and that no special incentives are paid to these 
dealers to induce sales of Trust units.
    5. Another concern underlying section 12(d)(3) was that an 
investment company may direct brokerage to a broker-dealer in which it 
has invested to enhance the broker-dealers' profitability or assist it 
during financial difficulty, although the broker-dealer may not offer 
the best price and execution. Applicants assert that their proposal 
does not raise this concern because, as a condition to the requested 
relief, the Trusts will not rely on the order to purchase securities of 
any issuer that executes portfolio transactions for the Trusts. 
Applicants also note that the Trusts, as unmanaged vehicles, do not 
engage in portfolio transactions with the same frequency or purpose as 
managed investment companies.
    6. Section 12(d)(3) also was designed to prevent the practice of a 
broker-dealer giving advice to its customers regarding which investment 
company to invest in based on whether the investment company has 
invested in the broker-dealer; thus using the investment company's 
assets to boost the price of the broker-dealer's securities. Applicants 
assert that the concern about purchases by a Trust affecting the price 
of the issuer's securities is not present in the proposed arrangement 
because a Trust does not actively trade its portfolio securities.

Applicants' Conditions

    Applicants agree that the order shall be subject to the following 
conditions:
    1. The debt obligations and non-voting preferred stocks held by a 
Trust relying on the order will be rated investment grade by a 
nationally recognized statistical rating organization or be of 
comparable quality at the time of their initial deposit.
    2. The common stocks held by a Trust relying on the order will be 
listed on a nationally or internationally recognized securities 
exchange or market at the time of their initial deposit.
    3. No company whose securities constitute more than 5% of the total 
assets of the portfolio of a Trust relying on the order nor any 
affiliate thereof will act as broker for any purchase or sale of any 
portfolio security for any Trust relying on the order.
    4. No Trust relying on the order will invest more than 5% of its 
total assets as of its initial date of deposit in the securities of any 
company that, to the knowledge of the Sponsors, has sold, or whose 
affiliate has sold, units of any other Trust within one year preceding 
such initial date of deposit.
    5. No company whose securities constitute more than 5% of the total 
assets of the portfolio of a Trust relying on the order nor any 
affiliate thereof will, for a period of at least one year after the 
date of the last deposit into the Trust, act as an underwriter of the 
units of any other Trust or be permitted to acquire any such units 
directly from a Sponsor.
    6. With respect to any securities acquired in reliance on the 
order, such securities will be acquired only in the secondary market 
and not as part of any offering by the issuers thereof.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18842 Filed 7-14-98; 8:45 am]
BILLING CODE 8010-01-M