[Federal Register Volume 64, Number 226 (Wednesday, November 24, 1999)]
[Notices]
[Pages 66217-66219]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-30652]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 24143; 812-11152]


Corporate Income Fund, et al., Notice of Application.

November 18, 1999.
AGENCY: Securities and Exchange Commission (``Commission'')

ACTION: Notice of an application under sections 6(c) and 17(b) of the 
Investment Company Act of 1940 (``Act'') for an exemption from section 
17(c) of the Act.

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SUMMARY OF APPLICATION: Applicants request an order that would permit 
transactions in certain securities between series of certain registered 
unit investment trusts. The requested order would supersede a prior 
order.

APPLICANTS: Corporate Income Fund and Equity Investor Fund, (the 
``Funds''), together with their present and future series (``Series''), 
and Merrill Lynch, Pierce, Fenner & Smith Incorporated (``Merrill 
Lynch''), Salomon Smith Barney Inc., Paine Webber Incorporated and Dean 
Witter Reynolds Inc. (together, the ``Sponsors'').

FILING DATES: The application was filed on August 11, 1998 and amended 
on October 1, 1998, March 25, 1999, July 23, 1999, and November 12, 
1999.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving applicants with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on December 13, 1999, 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 who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW, Washington, DC 
20549-0609; Applicants, c/o Merrill Lynch, P.O. Box 9051, Princeton, 
New Jersey 08543-9051.

FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Senior Counsel, at 
(202) 942-0574, or George J. Zornada, Branch Chief, at (202) 942-0564 
(Office of Investment Company Regulation, Division of Investment 
Management).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Branch, 450 Fifth Street, NW, Washington, 
DC 20549-0102 (tel. no. 202-942-8090).

Applicant's Representations

    1. Each Fund is registered under the Act as a unit investment trust 
(``UIT'') and is comprised of multiple Series. Each Series is created 
by a trust indenture (an ``Indenture'') among the Sponsors, a banking 
institution satisfying the criteria of section 26(a) of the Act that is 
unaffiliated with any Sponsor (``Trustee'') and, in certain cases, an 
independent evaluator that will be a ``qualified evaluator'' as defined 
in Rule 22-1(b)(2) under the Act (``Independent Evaluator''). 
Applicants also request relief for any future UIT sponsored by one or 
more of the Sponsors that becomes a party to an Indenture, and any 
future sponsor of one of more of the Series that becomes a party to an 
Indenture and for which Merrill Lynch acts as agent.\1\
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    \1\ Pursuant to powers of attorney executed by each of the other 
Sponsors, Merrill Lynch acts as agent for the Sponsors. The Sponsors 
agree that any such future UIT and any future sponsor will rely on 
the requested order only in accordance with the terms and conditions 
of the application.
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    2. Series may hold equity securities, preferred stocks, corporate 
bonds, and/or U.S. Treasury securities (``Treasuries''). As UITs, the 
Series are not actively managed. A Series generally holds securities 
until the Series terminates or, in the case of a Series holding 
preferred stocks or bonds, until the securities mature. A Series may 
sell portfolio securities (``Selling Series'') in connection with 
termination of the Series, to refund redemptions of its units, or under 
certain extraordinary circumstances specified in the Series' 
Indenture.\2\ At the same time, another Series (``Purchasing Series'') 
holding

[[Page 66218]]

one or more of the same securities as the Selling Series may be issuing 
additional units and may need to purchase the same securities that are 
being sold by the Selling Series. In addition, when certain Selling 
Series holding Treasuries terminate, the Sponsors may offer successor 
Series (``New Series'') that will hold the same Treasuries.
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    \2\ The Sponsors expect Selling Series to sell securities 
principally in connection with the termination of the Series and 
redemptions of their units. The Sponsors maintain a secondary market 
for the units and applicants state that as a practical matter 
redemptions are initiated only by the Sponsors because, with the 
exception of redemptions in kind, the Indenture requires the Trustee 
to sell units tendered for redemption to the Sponsors as long as 
they maintain a secondary market for the units.
    Securities also may be sold by a Series (a) to pay deferred 
sales charges, (b) to comply with subchapter M of the Internal 
Revenue Code or to avoid an excise tax on a Series that elected to 
be taxed as a regulated investment company, (c) if a security is not 
consistent with the Series' investment objective (e.g., if a 
security is received in exchange for a bond in a workout), and (d) 
if a right to redeem arises under the terms for the applicable 
credit support. The Indenture also authorizes sales under certain 
other circumstances but any sale made under those circumstances will 
not be made in reliance on the requested relief.
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    3. Applicants request relief to permit a Selling Series to sell 
Qualified Securities, as defined below, to a Purchasing Series and to 
allow the Purchasing Series to buy Qualified Securities.\3\ Applicants 
also seek relief to allow a teminating Selling Series (``Rollover 
Series'') holding Treasuries to sell Treasuries to a New Series.
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    \3\ The requested order would supersede a prior order that 
permitted a terminating Series to sell certain securities to a new 
Series. See Defined Asset Funds-Equity Income Fund, et al., 
Investment Company Act Release No. 20447 (Aug. 5, 1994) (Notice) and 
Release No. 20517 (Aug. 31, 1994) (Order).
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    4. Qualified Securities are limited to those securities that are: 
(a) actively traded (i.e. having an average daily trading volume during 
the preceding six months of at least 500 shares equal in value to at 
least $25,000) on a Qualified Exchange (as defined below) and (b) 
included in a published index. A Qualified Exchange is either: (a) a 
national securities exchange which meets the qualifications of section 
6 of the Securities Exchange Act of 1934, (b) the Nasdaq-NMS, or (c) a 
``qualified foreign exchange'' as set forth in the proposed amendments 
to rule 12d3-1(d)(6) under the Act and that releases daily closing 
prices.\4\
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    \4\ Investment Company Act Release No. 17096 (Aug. 3, 1989) 
(proposing amendments to rule 12d3-1). The proposed amended rule 
defined a ``Qualified Foreign Exchange'' to mean a stock exchange in 
a country other than the United States where: (1) trading generally 
occurred at least four days a week; (2) there were limited 
restrictions on the ability of acquiring companies to trade their 
holdings on the exchange; (3) the exchange had a trading volume in 
stocks for the previous year of at least U.S. $7.5 billion; and (4) 
the exchange had a turnover ratio for the preceding year of at least 
20% of its market capitalization. The version of the amended rule 
that was adopted did not include the part of the proposed amendment 
defining the term ``Qualified Foreign Exchange.''
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    5. Purchases and sales of securities are effected under the 
direction of the Buying Department of Merrill Lynch's Defined Asset 
Funds division (``Buying Department''). Pursuant to procedures to be 
adopted by the Sponsors and the Trustee upon the granting of an order 
requested by the application, the Buying Department will make an 
initial determination that two Series are on opposite sides of a 
transaction in Qualified Securities. Merrill Lynch, as agent for the 
Sponsors, will certify in writing to the Trustee of each affected 
Series, no later than the close of business on the business day 
following each sale pursuant to the requested order: (a) that the 
transaction is consistent with the investment objective and policies of 
each Series as stated in their respective registration statements and 
reports filed under the Act, (b) the reason that the Selling Series is 
selling the Qualified Securities, (c) the date of the transaction, (d) 
how the securities being sold meet the definition of Qualified 
Securities set forth in the requested order, and (e) the closing sale 
price of the Qualified Securities on the Qualified Exchange for the 
date the Qualified Securities are sold. The certification will be 
forwarded to the Trustee of each Series for its approval. The Trustee 
will then countersign the certificate, unless, in the event that the 
trustee disagrees with the price listed on the certificate, the Trustee 
immediately informs the agent for the Sponsors orally of any such 
disagreement and returns the certificate within five days with 
corrections duly noted. Upon receipt by the agent for the Sponsors can 
verify the correct price by reference to any independently published 
list of prices for the date of transaction, the agent for the Sponsors 
will ensure that the price of units of each of the Purchasing Series 
and the Selling Series accurately reflects the corrected price. To the 
extent that the agent for the Sponsors disagrees with the Trustee's 
corrected price, the agent for the Sponsors and the Trustee will 
jointly determine the correct sales price by reference to a mutually 
agreeable, independently published list of prices for the date of the 
transaction.
    6. In connection with the purchase of Treasuries by a New Series 
from a Rollover Series, sales would be effected at the offer-side 
evaluation of the Treasuries, as determined by the Independent 
Evaluator. In order to minimize the potential for overreaching in these 
situations, the agent for the Sponsors will certify in writing to the 
Trustee of both the Rollover and the New Series, within five days of 
each sale of Treasuries from a Rollover Series to a New Series: (a) 
that the transaction is consistent with the policies of both the 
Rollover Series and the New Series, as recited in their respective 
registration statements and reports filed under the Act, (b) the date 
of the transaction, and (c) the price determined by the Independent 
Evaluator for the sale date of the Treasuries. The Trustee will then 
countersign the certificate unless, in the event the Trustee disagrees 
with the price listed on the certificate, the Trustee immediately 
informs the agent for the Sponsors orally of any such disagreement and 
returns the certificate within five days with corrections duly noted. 
Upon the agent's receipt of a corrected certificate, the agent and the 
Trustee will jointly determine the correct sales price by reference to 
a mutually agreeable, published list of prices for the date of the 
transaction.

Applicants' Legal Analysis

    1. Section 17(a) of the Act prohibits an affiliated person of a 
registered investment company from selling securities to, or purchasing 
securities from, the company. Section 2(a)(3) of the Act defines an 
``affiliated person'' of another person to include, in pertinent part, 
any person directly or indirectly controlled, controlled by a under 
common control with, such other person. Each Series will have a common 
Sponsor. Since the Sponsor of a Series may be deemed to control the 
Series, all of the Series may be deemed to be under common control and, 
thus, affiliated persons of each other.
    2. Rule 17a-7 under the Act permits registered investment companies 
that might be deemed affiliated persons solely by reason of having 
common investment advisers, directors, and/or officers, to purchase 
securities from, or sell securities to, one another at an independently 
determined price, provided certain conditions are met. Applicants 
represent that they will comply with all of the provisions of rule 17a-
7, other than paragraphs (b) and (e).
    3. Paragraph (e) of rule 17a-7 requires an investment company's 
board of directors to adopt and monitor certain procedures to assure 
compliance with the rule. Since a UIT does not have a board of 
directors, the Series would be unable to comply with this requirement. 
Paragraph (b) of rule 17a-7 requires that the transactions be effected 
at the independent current market price of the security. The Treasuries 
would fall within the paragraph (b)(4) category of ``all other 
securities,'' for which the current market price under rule 17a-7(b) is 
the average of the highest current independent bid and lowest current 
independent offer determined on the basis on reasonable inquiry.
    4. Section 17(b) of the Act provides that the Commission shall 
exempt a proposed transaction from section 17(a) of the Act if the 
evidence establishes that: (a) the terms of the proposed transaction 
are reasonable and fair and do not involve overreaching, (b) the 
proposed transaction is consistent with the investment objectives and 
policies of the registered investment company involved, and (c) the 
proposed transaction is consistent with the

[[Page 66219]]

general purposes of the Act. Under section 6(c) of the Act, the 
Commission may exempt classes of transactions 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. Applicants believe 
that the proposed transactions satisfy the requirements of sections 
6(c) and 17(b).
    5. Applicants state that a sale of Qualified Securities by a 
Selling Series to a Purchasing Series will satisfy each of the 
requirements of rule 17a-7 other than paragraph (e). Applicants note 
that the requirement in rule 17a-7(e) that the board of directors adopt 
and monitor certain procedures was adopted, among other things, because 
transactions permitted by rule 17a-7 may involve entities that are not 
registered investment companies. Applicants state that their requested 
relief would extend only to transactions between registered UITs. 
Applicants submit that a Selling Series will sell its Qualified 
Securities to a Purchasing Series at the last sales price on the 
applicable Qualified Exchange on the sale date, without any brokerage 
charges or other remuneration except customary transfer fees. 
Applicants note that the agent for the Sponsors will represent that the 
transactions are consistent with the investment objectives of each 
Selling Series and each Purchasing Series. Applicants state that the 
requirement that the securities be Qualified Securities assures that 
only transactions in large active issues, which comprise a portion of a 
published index, will be authorized and therefore will ensure the 
availability of accurate prices. Applicants also state that the current 
practice by buying and selling on the open market leads to unnecessary 
brokerage fees, and that the requested relief will result in savings to 
investors.
    6. With respect to Treasuries, applicants state that sales by a 
Rollover Series to a New Series will comply with all of the provisions 
of rule 17a-7 other than paragraphs (b) and (e). Applicants state that 
the Treasuries would be sold by a Rollover Series to a New Series at 
the Treasuries' offer-side evaluation as determined by the Independent 
Evaluator. Other Treasuries acquired by the New Series will be acquired 
at the offer-side evaluation and the New Series would be valued during 
its initial offering period based on the Treasuries' offer-side 
evaluation. Applicants state that all unitholders of the New Series, 
both unitholders from a Rollover Series and new unitholders, will 
acquire units with a value based on the offer-side evaluation of the 
Treasuries. Applicants state that the sales of Treasuries between 
Series will reduce transaction costs to unitholders of the Selling 
Series. In addition, applicants state that the transactions will be 
consistent with the policy of each Series.

Applicants' Conditions

    Applicants agree that any order granting the requested relief shall 
be subject to the following conditions:
    1. Each sale of Qualified Securities between the Series will be 
effect at the closing price of the Qualified Securities sold on the 
applicable Qualified Exchange on the sale date. Each sale of Treasuries 
between the Series will be effected at the Treasuries' offer-side 
evaluation as determined by an Independent Evaluator as of the 
evaluation time on the sale date. Sales of Qualified Securities and 
Treasuries will be effected without any brokerage charges or other 
remuneration except customary transfer, fees, if any.
    2. The nature and conditions of such transactions will be fully 
disclosed to investors of each participating Series.
    3. The Trustee of each Series will (a) review the procedures 
relating to the sale of Qualified Securities and Treasuries from one 
Series to another and (b) make any changes to those procedures at the 
Trustee considers necessary as reasonably to comply with paragraphs 
(a), (b) (except for transactions in Treasuries), (c) and (d) and Rule 
17a-7.
    4. A written copy of these procedures and a written record of each 
transaction pursuant to the requested order will be maintained as 
provided in Rule 17a-7(f).

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-30652 Filed 11-23-99; 8:45 am]
BILLING CODE 8010-01-M