[Federal Register Volume 65, Number 60 (Tuesday, March 28, 2000)]
[Notices]
[Pages 16431-16433]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-7532]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 24344; 812-11430]


Equity Investor Fund, et al.; Notice of Application

March 21, 2000.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an 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)(F)(ii) of the Act and under sections 6(c) and 
17(b) of the Act for an exemption from section 17(a) of the Act.

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SUMMARY OF APPLICATION: The requested order would permit certain unit 
investment trusts (``UITs'') relying on section 12(d)(1)(F) of the Act 
to offer units with a sales load in excess of the limit in section 
12(d)(1)(F)(ii) of the Act. In addition, the requested order would 
permit a terminating series of a UIT to sell certain investment company 
shares to a new series of the UIT.

APPLICANTS: Merrill Lynch, Pierce, Fenner & Smith Incorporated 
(``Merrill Lynch''), Salomon Smith Barney Inc., Dean Witter Reynolds 
Inc. and Paine Webber Incorporated (collectively, the ``Sponsors''); 
and the Equity Investor Fund (``EIF'').

FILING DATES: The application was filed on December 10, 1998 and 
amended on April 20, 1999 and March 7, 2000. Applicants have agreed to 
file an amendment during the notice period, the substance of which is 
reflected in this notice.

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 April 17, 2000, 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, N.W., Washington, 
D.C. 20549-0609; Applicants, P.O. Box 9051, Princeton, NJ 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, 
(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 
Commission's Public Reference Branch, 450 Fifth Street, N.W., 
Washington, D.C. 20549-0102 (telephone (202) 942-8090).

Applicants' Representations

    1. EIF is registered under the Act as a UIT and is sponsored by one 
or more of the Sponsors. EIF consists of multiple series (``Series''), 
each created by a trust indenture between the Sponsors and a financial 
institution that satisfies the criteria of section 26(a) of the Act 
(the ``Trustee''). Each Sponsor is registered as a broker-dealer under 
the Securities Exchange Act of 1934 and is a member of the National 
Association of Securities Dealers, Inc. (``NASD''). Applicants request 
relief for each subsequently-issued Series and for any future 
registered UIT that is sponsored by one or more of the Sponsors and 
which becomes party to the trust indenture.
    2. Each Series will contain a portfolio of equity securities 
(``Fund Shares'') issued by registered investment companies that are 
not affiliated with any of the applicants (the ``Funds''). The Funds 
may be closed-end investment companies (``Closed-end Funds''), open-end 
investment companies (``Open-end Funds''), UITs or investment companies 
that are registered under the Act as open-end investment companies or 
UITs but have received exemptive relief under the Act to permit their 
shares to trade at negotiated prices on a national securities exchange 
(``Exchange-Traded Funds''). The Sponsors will deposit Fund Shares in a 
Series at the Fund Shares' net asset value (in the case of Open-end 
Funds and UITs) or at their market value (in the case of Closed-end 
Funds and Exchange-Traded Funds). Market value will be a Fund's closing 
sale price on a national securities exchange or the Nasdaq National 
Market System (``Nasdaq-NMS'') or, if unavailable, at the closing ask 
prices as determined by the Trustee.
    3. Simultaneously with the deposit of Fund Shares, the Trustee will 
deliver to the Sponsors units (``Units'') which represent the entire 
ownership of the Series. These Units will in turn be offered for sale 
to the public by the Sponsors. The Units will be offered at prices 
based on the aggregate value of the Fund Shares deposited (plus any 
cash, receivables (including dividends receivable) and any other assets 
of the Series less accrued liabilities), plus a sales charge and 
organization costs. The sales charges on the Units will not, when 
aggregated with any sales charge, distribution fees and service fees 
paid by the Series with respect to Fund Shares, exceed the limits set 
forth in rule 2830 of the NASD's Conduct Rules. Although a Series may 
invest in a Fund with an asset-based sales charge exceeding .25% of the 
Fund's average net assets, any fees paid by a Fund to the Sponsors or 
the Trustee will be rebated to the Series and used to reduce the 
Series' expenses.
    4. The portfolios of certain Series may be selected based on an 
asset allocation model or other selection criteria, which the 
investment strategy requires to be reapplied periodically. These Series 
(``Rollover Series'') may terminate approximately one or two years 
after they are offered for sale. At that time, the Sponsors intend to 
create and offer a new Series (``New Series''), the portfolio of which 
will reflect the current asset allocation model or reapplication of the 
selection process and may contain the same Fund Shares as the Rollover 
Series. Investors in the Rollover Series may elect to invest in the New 
Series.
    5. Applicants request relief to permit a Rollover Series to sell 
Fund Shares to the New Series. In order to minimize the potential for 
overreaching, Merrill Lynch as agent for the Sponsors will certify in 
writing to the Trustee, within five days of each sale of Fund Shares 
from a Rollover Series to a New Series: (a) That the transaction is 
consistent with the policy of both the Rollover Series and the New 
Series, as recited in their respective registration statement and 
reports filed under the Act, (b) the date of the transaction, and (c) 
the net asset value of the Fund in the case of an Open-end Fund or UIT, 
or the closing sale price on a national securities

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exchange or Nasdaq-NMS in the case of a Closed-end Fund or Exchange 
Fund. The Trustee will then countersign the certificate unless, in the 
event the Trustee disagrees with a price listed on the certificate, the 
Trustee immediately informs Merrill Lynch orally of any such 
disagreement and return the certificate within five days to Merrill 
Lynch with corrections duly noted. Upon Merrill Lynch's receipt of a 
corrected certificate, Merrill Lynch and the Trustee will jointly 
determine the correct closing sale price by reference to a mutually 
agreeable, published list of prices for the date of the transaction.

Applicants' Legal Analysis

A. 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 issued by another investment 
company if such securities represent more than 3% of the total 
outstanding voting stock of the acquired company, more than 5% of the 
value of the total assets of the acquiring company, or if securities 
issued by the acquired company and all other investment companies have 
an aggregate value in excess of 10% of the value of the total assets of 
the acquiring company.
    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 if, 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 all affiliated 
persons of the acquiring company, 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's 
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. The Series will invest in Fund 
Shares in reliance on section 12(d)(1)(F).
    3. Section 12(d)(1)(J) of the Act provides that the Commission may 
exempt persons or transactions from any provision of section 12(d)(1) 
if and to the extent such exemption is consistent with the public 
interest and the protection of investors. Applicants request an 
exemption under section 12(d)(1)(J) to permit a Series relying on 
section 12(d)(1)(F) to offer Units with a sales load in excess of 1.5%. 
For the reasons stated below, applicants believe that the requested 
relief meets the standards of section 12(d)(1)(J).
    4. While each Series may charge a sales load, the Sponsors will 
deposit the Fund Shares at net asset value (i.e., without any sales 
charge). To further limit the extent to which unitholders may pay 
indirectly for distribution costs of the underlying Funds, any fees 
paid by a Fund to the Sponsors or the Trustee will be rebated to the 
Series. Applicants also have agreed, as a condition to the requested 
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 Series relating 
to its acquisition, holding, or disposition of Fund Shares, 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). As a result, the aggregate sales charges will not 
exceed the limit that otherwise could be charged at any single level.

B. Section 17(a) of the Act

    1. Section 17(a) of the Act generally makes it unlawful for an 
affiliated person of a registered investment company to sell securities 
to or purchase securities from the company. Applicants submit that the 
Series may be deemed to be affiliated persons of one another by virtue 
of being under common control because they have one or more common 
Sponsors. The Series therefore may be unable to sell and purchase Fund 
Shares to and from each other without an exemption from section 17(a) 
of the Act. Accordingly, applicants request relief to permit a Rollover 
Series to sell Fund Shares to a New Series (``Rollover Transactions'').
    2. Section 17(b) of the Act permits the Commission to grant an 
order permitting a transaction otherwise prohibited by section 17(a) if 
it finds that the terms of the proposed transaction, including the 
consideration to be paid or received, are fair and reasonable and do 
not involve overreaching on the part of any person concerned and the 
proposed transaction is consistent with the policy of the registered 
investment company and the general purposes of the Act. Section 6(c) of 
the Act permits the Commission to 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 policies and provisions of the 
Act. For the reasons stated below, applicants believe that the terms of 
the Rollover Transactions meet the standards of sections 6(c) and 17(b) 
of the Act.
    3. Rule 17a-7 under the Act permits registered investment companies 
that might be deemed affiliated persons solely by reason of having a 
common investment adviser, directors, and/or officers, to purchase 
securities from or to sell securities to one another, 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).
    4. Rule 17a-7(b) requires that the transactions be effected at the 
independent current market price of the security. Shares of Open-end 
Funds and UITs would fall within the category of ``all other 
securities'' in paragraph (b)(4) of the rule, for which the current 
market price under rule 17a-7(b) is the average of the highest current 
independent bid and the lowest current independent offer determined on 
the basis of reasonable inquiry. Applicants state that shares of Open-
end Funds and UITs do not trade at a bid or offer price but at an 
independently-determined net asset value.
    5. Rule 17a-7(e) requires an investment company's board of 
directors to adopt and monitor procedures for transactions effected 
pursuant to the rule to assure compliance with the rule. Because a UIT 
does not have a board of directors, applicants state that there can be 
no board review of the Rollover Transactions.
    6. Applicants submit that engaging in Rollover Transactions will 
not disadvantage either the Rollover Series or the New Series. 
Applicants note that Rollover Transactions may reduce costs to 
unitholders of the Series. In addition, the Rollover Transactions will 
be consistent with the policy of each Series, as only securities that 
would otherwise be bought and sold on the open market pursuant to the 
policy of each Series will be involved in the Rollover Transactions.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. Each 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

[[Page 16433]]

sales charges, distribution-related fees and service fees paid by a 
Series relating to its acquisition, holding or disposition of Fund 
Shares, will not exceed the limits set forth in rule 2830(d) for the 
NASD Conduct Rules.
    3. Each sale of Fund Shares between the Series will be effected at 
the net asset value of the Fund Shares as determined by the Fund on the 
sale date or, if traded on a national securities exchange or Nasdaq-
NMS, the closing sale price on the sale date. Such sales will be 
effected without any brokerage commissions or other remuneration except 
customary transfer fees, if any.
    4. The nature and conditions of such transactions will be disclosed 
to investors in the prospectus of each Series.
    5. The Trustee of each Rollover Series and New Series will (a) 
review the procedures relating to the sale of Fund Shares from a 
Rollover Series and the purchase of Fund Shares for deposit in a New 
Series and (b) make such changes to the procedures as the Trustee deems 
necessary that are reasonably designed to comply with paragraphs (a), 
(c) and (d) of rule 17a-7.
    6. A written copy of these procedures and a written record of each 
transaction effected pursuant to the requested order will be maintained 
as provided in rule 17a-7(f).
    7. No Series will acquire securities of a Fund which, at the time 
of acquisition, owns securities of any other investment company in 
excess of the limits contained in section 12(d)(1)(A) of the Act.
    8. No Series will terminate within 30 days of the termination of 
any other Series that holds shares of one or more common Funds.
    9. The prospectus of each Series and any sales literature or 
advertising that mentions that 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. 00-7532 Filed 3-27-00; 8:45 am]
BILLING CODE 8010-01-M