[Federal Register Volume 64, Number 144 (Wednesday, July 28, 1999)]
[Notices]
[Pages 40915-40918]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-19223]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23917; 812-11628]


Deutsche Bank Securities Inc.; Notice of Application

July 21, 1999.
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 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: Deutsche Bank Securities Inc. (``Deutsche 
Securities'') requests an order with respect to the METS trusts (``METS 
Trusts'' \1\ and future trusts that are substantially similar to the 
METS Trusts and for which Deutsche Securities 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 section 3(c)(1) or (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 the Trusts from the initial net worth 
requirements of section 14(a), and (iii) permit the Trusts to purchase 
U.S. government securities from Deutsche Securities at the time of a 
Trust's initial issuance of Securities.
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    \1\ ``METS'' is an acronym for Mandatory Exchangeable Trust 
Securities.

FILING DATE: The application was filed on May 19, 1999. Applicant has 
agreed to file an amendment during the notice period, the substance of 
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which is reflected in the 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 
Deutsche Securities 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 
16, 1999, and should be accompanied by proof of service on Deutsche 
Securities, 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, NW, Washington, DC 20549-
0609. Applicant, 1 South Street, Baltimore, Maryland 21202.

FOR FURTHER INFORMATION CONTACT:
Bruce R. MacNeil, Staff Attorney, at (202) 9420634, 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, 450 Fifth Street, NW, Washington, DC 
20549-0102 (tel. (202) 942-8090).

Applicant's Representations

    1. Each Trust will be a limited-life, grantor trust registered 
under the Act as a non-diversified, closed-end management investment 
company. Deutsche Securities will serve as a principle 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,\2\ 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 not affiliated with either the relevant Trust or Deutsche 
Securities. The investment objective of each Trust will be to provide 
to each holder of Securities (``Holder'') (i) periodic 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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    \2\ 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.\3\ 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 Holder's pro rata interest 
in the Shares or amount received by the Trust under the Contracts.\4\
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    \3\ 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.
    \4\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 Nasdaq National Market 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. Deutsche 
Securities currently intends, but will not be obligated, to

[[Page 40916]]

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 limited 
or no power to vary the investments held by each Trust. A bank or banks 
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 
administrator, paying agent, registrar, and transfer agent with respect 
to the Securities of each Trust. Any such 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 Deutsche Securities or by 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 certain events 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 events provided for in the Contract, the obligations of the 
counterparty under the Contract may be accelerated and the available 
proceeds of the Contract will be distributed to the Holders.
    7. The trustees of each Trust will be selected initially by 
Deutsche Securities, 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 Securities of the Trust, to remove a trustee. Holders will 
be entitled to a full vote for each Security held on 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'' \5\ 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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    \5\ 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 will 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 Deutsche Securities, 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 Deutsche Securities).

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 expected 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, the exemption is consistent with the public interest and 
protection of investors.
    3. Deutsche Securities states that, in order for the Trusts to be 
marketed most successfully, and to be traded at a price that most 
accurately reflects their value, it is necessary for the Securities of 
each Trust to be offered to large investment companies and investment 
company complexes. Deutsche Securities states that these investors seek 
to spread the fixed costs of analyzing specific investment 
opportunities by making sizable investments in those opportunities. 
Conversely, Deutsche Securities 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 
ultimate be permitted to purchase is immaterial in light of the total 
assets of the investment company or investment company complex. 
Therefore, Deutsche Securities 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). Deutsche Securities 
requests that the SEC issue an order under section 12(d)(1)(J) 
exempting the Trusts from the limitations.
    4. Deutsche Securities 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. Deutsche 
Securities also states that section 12(d)(1) was intended to address 
the layering of costs to investors.
    5. Deutsche Securities asserts 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, Deutsche Securities 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. Deutsche 
Securities also states 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. Deutsche Securities states 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

[[Page 40917]]

because generally these fees and expenses will be borne, directly or 
indirectly, by Deutsche Securities 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. Deutsche Securities 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 Deutsche Securities, 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. Deutsche Securities asserts 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, Deutsche Securities 
asserts 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. Deutsche Securities 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 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 a eligible trust 
securities shall be exempt from net worth requirement, provided that 
the trust holds at least $100,000 of eligible trust securities at the 
commence of a public offering.
    2. Deutsche Securities 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 a disclosed portfolio that is held 
until maturity. Deutsche Securities 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. Deutsche Securities 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, Deutsche Securities 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. Deutsche Securities 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. Deutsche Securities request that the SEC 
issue an order under section 6(c) exempting the Trusts from the 
requirements of section 14(a). Deutsche Securities 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 Deutsche Securities.
    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. Deutsche Securities requests an exemption from 
sections 17(a)(1) and (2) to permit the Trusts to purchase Treasuries 
from Deutsche Securities.
    3. Deutsche Securities 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. Deutsche Securities 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. Deutsche 
Securities 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. Deutsche Securities 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. Deutsche Securities 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. 
Deutsche Securities 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.

[[Page 40918]]

    5. Deutsche Securities 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

    Deutsche Securities 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 designed to provide that the conditions set forth 
below have been complied with; (ii) will make and approve such changes 
as rare 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 Deutsche Securities, 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.
    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 remuneration to be received by 
Deutsche Securities 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 SEC, by the Division of Investment Management, pursuant 
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-19223 Filed 7-27-99; 8:45 am]
BILLING CODE 8010-01-M