[Federal Register Volume 66, Number 128 (Tuesday, July 3, 2001)]
[Notices]
[Pages 35286-35288]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-16634]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25052; 812-11262]


Apex Municipal Fund, Inc., et al.; Notice of Application

June 26, 2001.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under sections 6(c), 10(f), and 17(b) 
of the Investment Company Act of 1940 (``Act'') for exemptions from 
sections 10(f) and 17(a) of the Act.

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    Summary of Application: The requested order would permit certain 
management investment companies to purchase municipal securities 
through group orders where an affiliated broker-dealer is a member of 
the underwriting syndicate.
    Applicants: Apex Municipal Fund Inc., CMA Multi-State Municipal 
Series Trust, CMA Tax-Exempt Fund, Merrill Lynch California Municipal 
Series Trust, Merrill Lynch High Income Municipal Bond Fund, Inc., 
Merrill Lynch Institutional Tax-Exempt Fund, Merrill Lynch Multi-State 
Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State 
Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., 
Merrill Lynch Municipal Strategy Fund, Inc., Merrill Lynch Municipal 
Series Trust, MuniAssets Fund, Inc., The Municipal Fund Accumulation 
Program, Inc., MuniEnhanced Fund, Inc., MuniHoldings California Insured 
Fund, Inc., MuniHoldings Florida Insured Fund, MuniHoldings Fund, Inc., 
MuniHoldings Fund II, Inc., MuniHoldings Insured Fund, Inc., 
MuniHoldings Insured Fund II, Inc., MuniHolding Michigan Insured Fund 
II, Inc., MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New 
York Insured Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., 
MuniVest Fund II, Inc., MuniYield Arizona Fund, Inc., MuniYield 
California Fund, Inc., MuniYield California Insured Fund, Inc., 
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, 
MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured 
Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured 
Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey 
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield 
Pennsylvania Insured Fund, MuniYield Quality Fund, Inc., MuniYield 
Quality Fund II, Inc. (collectively, the ``Funds''); Merrill Lynch 
Investment Managers, L.P. (``MLIM'') and Fund Asset Management, L.P. 
(``FAM'') (each an ``Adviser'' and, collectively, the ``Advisers''); 
and Merrill Lynch Pierce, Fenner & Smith Incorporated (``MLPF&S'').
    Filing Dates: The application was filed on August 14, 1998, and 
amended on June 25, 2001.
    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 July 23, 2001 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, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549-0609. Applicants, c/o Philip L. 
Kirstein, Esq., MLIM, Box 9011, Princeton, NJ 08543-9011.

FOR FURTHER INFORMATION CONTACT: Karen L. Goldstein, Senior Counsel, at 
(202) 942-0646, 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 at the 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (telephone (202) 942-8090).

Applicants' Representations

    1. Each fund is an open-end or closed-end management investment 
company registered under the Act. The investment objective of each Fund 
is to seek as high a level of current income exempt from federal tax 
and, to the

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extent applicable, state and local taxes as is consistent with its 
investment approach. To meet this objective, the Funds invest in 
Eligible Municipal Securities, as that term is defined in rule 10f-
3(a)(3) under the Act.\1\ Applicants state that, with approximately 
$40.4 billion in assets under management, the Funds comprise one of the 
largest municipal bond fund complexes.
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    \1\ The term Eligible Municipal Securities generally refers to 
municipal securities that have received an investment grade rating 
from at least one NRSRO. The term ``municipal securities,'' as 
defined in section 3(a)(29) of the Securities Exchange Act of 1934, 
generally refers to securities that are issued by or on behalf of 
states or their political subdivisions, agencies and 
instrumentalities, the interest on which is exempt from federal 
taxation.
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    2. Each Fund has an investment advisory agreement with an Adviser 
pursuant to which the Adviser provides investment advisory services to 
the Fund. Each Adviser is registered as an investment adviser under the 
Investment Advisers Act of 1940. Both Advisers are owned and controlled 
by Merrill Lynch & Co., Inc. (``ML & Co.'').
    3. MLPF&S, a registered broker-dealer, is a wholly-owned subsidiary 
of ML & Co. MLPF&S participates as an underwriter in a substantial 
number of public offerings. Applicants state that MLPF&S is one of the 
top underwriters in most types of municipal securities. In 1999, for 
example, MLPF&S was lead manager or co-manager of approximately $50.95 
billion, or 23.25%, of the dollar volume of new issues of municipal 
securities having a remaining maturity of more than thirteen months, 
and of approximately $3.10 billion, or 10% of those having a remaining 
maturity of thirteen months or less.
    4. Applicants request relief from section 10(f) of the Act under 
section 10(f) and from section 17(a) of the Act under sections 6(c) and 
17(b) of the Act to permit the Funds to place group orders for Eligible 
Municipal Securities with an underwriting syndicate that includes 
MLPF&S. A group order is an order that is allocated to all members of 
the syndicate in proportion to their respective participations. The 
requested relief would extend only to situations where: (i) the 
syndicate is accepting only group orders; or (ii) the lead manager of 
the syndicate believes the offering will be oversubscribed at the time 
the Funds place their order, and group orders will be given priority 
over net designated orders.\2\ Applicants also request that the relief 
apply to registered management investment companies organized in the 
future that invest in Eligible Municipal Securities and are advised by 
an Adviser (including any successors in interest) \3\ or by an entity 
controlling, controlled by, or under common control with an Adviser 
(``Future Funds'').
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    \2\ In a net designated order, the designated members of the 
syndicate sharing the order retain the entire commission generated 
by the order.
    \3\ The term ``successors in interest'' is limited to entities 
that result from a reorganization into another jurisdiction or 
change in the type of business organization. Each Fund that 
currently intends to rely upon the requested order has been named as 
an applicant. Any Future Fund and any investment adviser of a Future 
Fund that relies on the order will comply with the terms and 
conditions of the application. For purposes of determining 
compliance with rule 10f-3(b)(7) under the Act, FAM, MLIM and any 
investment adviser of a Future Fund will be considered the same 
investment adviser.
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Applicant's Legal Analysis

    1. Section 10(f), in relevant part, prohibits a registered 
investment company from purchasing securities from an underwriting 
syndicate in which an affiliated person of the company's investment 
adviser acts as a principal underwriter. Under section 2(a)(3) of the 
Act, MLPF&S is an affiliated person of each Adviser because all three 
entities are under the control of ML & Co.
    2. Section 10(f) further provides that the Commission, by rule or 
order, may exempt any transaction or class of transactions from the 
provisions of section 10(f) to the extent that the exemption is 
consistent with the protection of investors. Rule 10f-3 under the Act 
permits a registered investment company to make purchases otherwise 
prohibited by section 10(f) under certain conditions, including that 
purchases of municipal securities may not be made through group orders 
or otherwise allocated to the account of an underwriter affiliated with 
the company's investment adviser. Applicants state that rule 10f-3 
prevents the Funds from placing group orders for Eligible Municipal 
Securities with an underwriting syndicate that includes MLPF&S.
    3. Section 17(a) generally prohibits an affiliated person of a 
registered investment company, or an affiliated person of such person, 
acting as principal, from selling securities to the investment company. 
Applicants submit that a Fund's submission of a group order for 
Eligible Municipal Securities to a syndicate that includes MLPF&S may 
be deemed a principal transaction between the Fund and MLPF&S and thus 
prohibited by section 17(a).
    4. Section 17(b) authorizes the Commission to exempt a transaction 
from the provisions of section 17(a) if it finds that the terms of the 
proposed transaction are fair and reasonable and do not involve 
overreaching on the part of any person concerned, and that the proposed 
transaction is consistent with the policy of the registered investment 
company and the general purposes of the Act. Section 6(c), in relevant 
part, permits the Commission to exempt a class of transactions from any 
provision of the Act 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. Applicants believe that the requested 
exemptions meet the standards for relief set forth in sections 6(c), 
10(f), and 17(b).
    5. According to applicants, several factors have had, and 
increasingly will have, a significant negative impact on the ability of 
the Advisers to make appropriate municipal securities investments of 
the Funds. Applicants contend that increased investor demand for tax-
exempt investment opportunities has resulted in fierce competition or 
municipal securities among individual investors and funds investing in 
such securities and that, at the same time, the supply of new issues of 
municipal securities has declined. Applicants further contend that, 
since passage of the Tax Reform Act of 1986, a number of underwriters 
have reduced or eliminated their municipal bond business. Applicants 
assert that this development has been coupled with a dramatic 
consolidation among investment banks acting as underwriters and 
dealers. According to applicants, this consolidation among underwriters 
has had the effect of boosting MLPF&S's participation in municipal 
securities underwritings generally and that, as a result, the Funds' 
opportunities to purchase municipal securities from syndicates that do 
not include MLPF&S have diminished significantly.
    6. Applicants also assert that there is an increasing tendency in 
municipal securities offerings for the underwriting syndicate to give a 
higher priority to group orders than to net designated orders, and that 
group orders are comprising an increasing percentage of MLPF&S's 
negotiated transaction business. For example, in the calendar year 
period ending December 31, 1999, 23.08% of MLPF&S's total senior 
managed negotiated transaction business was conducted on a group order 
basis, compared with only 10.05% for the corresponding period in 1998.
    7. Applicants assert that, without the requested relief, the Funds 
may have to pay higher prices for Eligible Municipal Securities in the 
secondary market and may risk being underinvested at times due to a 
lack of other appropriate

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investment opportunities. Applicants believe that the conditions to the 
order will ensure that the Funds place group orders only where 
reasonably necessary to enable them to purchase suitable portfolio 
securities in the desired quantities.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. The terms of the order will apply only to purchases of Eligible 
Municipal Securities in negotiated underwritings.
    2. Applicants will comply with all provisions of rule 10f-3 except 
for paragraph (b)(8) to the extent that it prohibits the purchase of 
Eligible Municipal Securities through group orders when MLPF&S is a 
member of the underwriting syndicate.
    3. The Advisers may enter group orders on behalf of the funds when 
MLPF&S is a member of the underwriting syndicate only where: (i) the 
lead manager for the syndicate has informed the Advisers that only 
group orders are being accepted; or (ii) as of the time the Advisers 
placed an order, and based on the orders received by the syndicate 
through that time, the lead manager believed that total orders would 
exceed the available quantity of Eligible Municipal Securities (i.e., 
the Eligible Municipal Securities will be oversubscribed) and group 
orders will receive a higher priority than net designated orders.
    4. At the time of purchase by a Fund, MLPF&S will not be obligated 
for more than 50% of the Eligible Municipal Securities being offered by 
the relevant underwriting syndicate.
    5. The Advisers may place group orders on behalf of the Funds 
through MLPF&S or any unaffiliated member of the syndicate, but may 
not, under any circumstances, place a net designated order for the 
credit of or through MLPF&S.
    6. For all purchases by a Fund of Eligible Municipal Securities 
when MLPF&S is a member of the underwriting syndicate, there will be a 
substantially contemporaneous notation made at the time the Advisers 
place an order indicating that the lead manager has stated that only 
group orders will be accepted, or that the lead manager believed at 
such time that the Eligible Municipal Securities will be oversubscribed 
and group orders will receive a higher priority than net designated 
orders. Where MLPF&S is the lead manager, such notation will be 
provided in writing by MLPF&S to the Advisers. Where there is an 
unaffiliated lead manager, the Advisers will obtain orally from the 
lead manager a representation to the foregoing effect and will note the 
receipt thereof on the trade ticket. The Advisers also will obtain from 
the lead manager a copy of the information described in rule G-11(f) of 
the Municipal Securities Rulemaking Board. At the close of the 
offering, the Advisers will make a notation as to whether the offering 
was oversubscribed. This documentation will be included as part of the 
Fund's compliance with the periodic reporting and recordkeeping 
requirements of rule 10f-3, set forth in paragraphs (b)(9) and 
(b)(11)(ii), respectively.
    7. The board of directors (or trustees) of the Fund, including a 
majority of the directors (or trustees) who are not interested persons 
under section 2(a)(19) of the Act, will review no less frequently than 
quarterly each purchase of Eligible Municipal Securities made by the 
Fund pursuant to the order. The board will determine that the terms of 
the transactions were reasonable and fair to the shareholders of the 
Fund and did not involve overreaching of the Fund or its shareholders 
on the part of any person concerned. Among other things, the board will 
consider the number of instances in which a notation made pursuant to 
condition 6 above indicated that the offering was going to be 
oversubscribed when, according to the notation made at the close of the 
offering pursuant to condition 6 above, it was not oversubscribed. In 
considering whether the price paid for the Eligible Municipal 
Securities was reasonable and fair, the price of the Eligible Municipal 
Securities will be analyzed with respect to comparable transactions 
identified by MLPF&S or the Advisers involving similar securities being 
purchased or sold during a comparable period of time, if such 
transactions could reasonably be found to have existed.
    8. The order will be valid only so long as the Advisers, on the one 
hand, and MLPF&S, on the other, operate as separate entities and 
independent profit centers within the holding company framework of ML & 
Co., with separate capitalization, separate books and records, and 
substantially separate officers and employees. ML & Co. will not have 
any involvement with respect to proposed transactions pursuant to the 
order and will not attempt to influence or control in any way the 
placing by the Funds or the Advisers of orders with MLPF&S.
    9. The legal departments of MLPF&S and the Advisers will prepare 
guidelines for personnel of MLPF&S and the Advisers to make certain 
that transactions conducted pursuant to the order comply with the above 
conditions, and that the parties maintain arm's length relationships. 
In the training of personnel of MLPF&S, particular emphasis will be 
given to the fact that the subject transactions may occur only where 
the lead manager has informed the Advisers in the manner described in 
condition 6 above that group orders are required for purchase, or that 
the lead manager believes the Eligible Municipal Securities will be 
oversubscribed and that group orders will receive a higher priority 
than net designated orders. and that the Advisers may not place net 
designated orders for the credit of or through MLPF&S. the legal 
departments will periodically monitor the activities of MLPF&S and the 
Advisers to make certain of adherence to the conditions set forth in 
the order.
    10. For three years following the issuance of the order, the 
Advisers will produce data listing the purchases of Eligible Municipal 
Securities made by the Funds pursuant to the order during the preceding 
year, indicating whether each purchase was effected under the 
circumstances described above in condition 3(i) or 3(ii) and the 
percentage of the offering that was purchased by the Funds. MLPF&S will 
produce data and provide copies to the Advisers showing the number of 
Eligible Municipal Securities underwritings when: (i) MLPF&S was a 
member of the underwriting syndicate and only group orders were 
accepted or the Eligible Municipal Securities were oversubscribed and 
group orders received a higher priority than net designated orders; and 
(ii) MLPF&S was lead manager or co-manager and only group orders were 
accepted or the Eligible Municipal Securities were oversubscribed and 
group orders received a higher priority than net designated orders; and 
(ii) MLPF&S was lead manager or co-manager and only group orders were 
accepted or the Eligible Municipal Securities were oversubscribed and 
group orders received a higher priority than net designated orders. The 
above information will be included as part of the Funds' compliance 
with the periodic reporting and recordkeeping requirements of rule 10f-
3, set forth in paragraphs (b)9) and (b)(11)(ii), respectively.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-16634 Filed 7-2-01; 8:45 am]
BILLING CODE 8010-01-M