[Federal Register Volume 60, Number 80 (Wednesday, April 26, 1995)]
[Notices]
[Pages 20545-20547]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10223]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21024; 812-9524]
Equity Income Fund, Select Ten Portfolio
April 20, 1995.
agency: Securities and Exchange Commission (``SEC'').
action: Notice of application for exemption under the Investment
Company Act of 1940 (the ``Act'').
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applicant: Equity Income Fund, Select Ten Portfolio.
relevant act sections: Order requested under section 6(c) of the Act
that would exempt applicant from section 12(d)(3) of the Act.
summary of application: Applicant requests an order on behalf of its
series (the ``Series'') and the Series' component trusts (the
``Trusts'') to permit each Trust to invest up to ten percent of its
total assets in securities of issuers that derived more than fifteen
percent of their gross revenues in their most recent fiscal year from
securities related activities.
filing date: The application was filed on March 14, 1995 and amended on
April 20, 1995.
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
applicant with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on May 15, 1995 and
should be accompanied by proof of service on the applicant, 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 5th Street, N.W., Washington, D.C.
20549. Applicant, c/o Merrill Lynch, Pierce Fenner & Smith
Incorporated, P.O. Box 9051, Princeton, N.J. 08543-9051.
for further information contact: Marianne H. Khawly, Staff Attorney, at
(202) 942-0562, or C. David Messman, 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 from
the SEC's Public Reference Branch.
Applicant's Representations
1. Each Series will be a series of Equity Income Fund, Select Ten
Portfolio, a unit investment trust registered under the Act, composed
of one or more separate Trusts. Merrill Lynch, Pierce, Fenner & Smith
Incorporated (``Merrill Lynch''), Prudential Securities Incorporated,
PaineWebber Incorporated, Smith Barney Inc., and Dean Witter Reynolds
[[Page 20546]] Inc. are applicant's depositors (collectively, the
``Sponsors'').
2. Each Trust will invest approximately 10%, but in no event more
than 10.5%,\1\ of the value of its total assets in each of the ten
common stocks in the Financial Times Index or the Hang Seng Index with
the highest dividend yields as of its initial date of deposit, and hold
those stocks over the life of the Trust (presently anticipated to be
approximately one year).
\1\The Sponsors will attempt to purchase equal values of each of
the ten common stocks in a Trust's portfolio and may choose to
purchase the securities in odd lots in order to achieve this goal.
However, it is more efficient if securities are purchased in 100
share lots and board lots. A board lot is comprised of a fixed
number of shares determined by the issuer. Most fees associated with
trading, settling, and transferring of Hong Kong securities are
charged on a per board lot basis. As a result, the Sponsors may
choose to purchase securities of a securities related issuer which
represent over 10%, but in no event more than 10.5% percent, of a
Trust's assets on the initial date of deposit to the extent
necessary to enable the Sponsors to meet their purchase requirements
and to obtain the best price for the securities.
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3. The Financial Times Index comprises 30 common stocks chosen by
the editors of The Financial Times (London) as representative of
British industry and commerce. The companies are major factors in their
industries and their stocks are widely held by individuals and
institutional investors. The Hang Seng Index comprises 33 of the stocks
listed on the Hong Kong Stock Exchange and includes companies intended
to represent four major market sectors: commerce and industry, finance,
properties, and utilities. The Hang Seng Index is a recognized
indicator of stock market performance in Hong Kong.
4. The portfolio securities deposited in each Trust will be chosen
solely according to the formula described above, and will not
necessarily reflect the research opinions or buy or sell
recommendations of the Sponsors. The Sponsors will have no discretion
as to which securities are purchased. Securities deposited in a Trust
may include securities of issuers that derived more than fifteen
percent of their gross revenues in their most recent fiscal year from
securities related activities.
5. During the 90-day period following the initial date of deposit,
the Sponsors may deposit additional securities while maintaining to the
extent practicable the original proportionate relationship among the
number of shares of each stock in the portfolio. Deposits made after
this 90-day period generally must replicate exactly the proportionate
relationship among the face amounts of the securities comprising the
portfolio at the end of the initial 90-day period, whether or not a
stock continues to be among the ten highest dividend yielding stocks.
6. A Trust's portfolio will not be actively managed. Sales of
portfolio securities will be made in connection with redemptions of
units issued by a Trust and at termination of the Trust. The Sponsors
have no discretion as to when securities will be sold except that it is
authorized to sell securities in extremely limited circumstances,
namely, upon failure of the issuer of a security in a Trust to pay
amounts due on any of the securities, institution of certain legal
proceedings, default under certain documents materially and adversely
affecting future declaration or payment of amounts due, or the
occurrence of other market or credit factors that in the opinion of the
Sponsors would make the retention of such securities in a Trust
detrimental to the interests of the unitholders. The adverse financial
condition of an issuer will not necessarily require the sale of its
securities from a Trust's portfolio.\2\
\2\In the master agreement among underwriters, the other
Sponsors have appointed Merrill Lynch as agent for the Sponsors. In
that capacity, Merrill Lynch is authorized to determine the date of
deposit, to purchase securities for deposit in the Series and to
supervise each Series' portfolio.
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Applicant's Legal Analysis
1. Section 12(d)(3) of the Act, with limited exceptions, prohibits
an investment company from acquiring any security issued by any person
who is a broker, dealer, underwriter, or investment adviser. Rule 12d3-
1 under the Act exempts the purchase of securities of an issuer that
derived more than fifteen percent of its gross revenues in its most
recent fiscal year from securities related activities, provided that,
among other things, immediately after such acquisition, the acquiring
company has invested not more than five percent of the value of its
total assets in securities of the issuer.
2. Section 6(c) of the Act provides that the SEC may exempt a
person from any provision of the Act or any rule thereunder, 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.
3. Applicant requests an exemption under section 6(c) from section
12(d)(3) to permit any Trust to invest up to approximately 10%, but in
no event more than 10.5%, of the value of its total assets in
securities of an issuer that derives more than fifteen percent of its
revenues from securities related activities. Applicant and each Trust
will comply with all provisions of rule 12d3-1, except for the five
percent limitation in paragraph (b)(3) of the rule.
4. Section 12(d)(3) was intended to prevent investment companies
from exposing their assets to the entrepreneurial risks of securities
related businesses, to prevent potential conflicts of interest, and to
eliminate certain reciprocal practices between investment companies and
securities related businesses. One potential conflict could occur if an
investment company purchased securities or other interests in a broker-
dealer to reward that broker-dealer for selling fund shares, rather
than solely on investment merit. Applicant believes that this concern
does not arise in connection with its application because neither
applicant nor the Sponsors have discretion in choosing the portfolio
securities or percentage amount purchased. The security must first be
included in the Financial Times Index or the Hang Seng Index, which
indexes are unaffiliated with the Sponsors and applicant, and must also
qualify as one of the ten highest dividend yielding securities.
5. Applicant also believes that the effect of a Trust's purchase on
the stock of parents of broker-dealers would be de minimis. Applicant
asserts that the common stocks of securities related issuers
represented in the Financial Times Index or the Hang Seng Index are
widely held, have active markets, and that potential purchases by any
Trust would represent an insignificant amount of the outstanding common
stock and the trading volume of any of these issues. Accordingly,
applicant believes that it is highly unlikely that Trust purchases of
these securities would have any significant impact on the securities'
market value.
6. Another potential conflict of interest could occur if an
investment company directed brokerage to a broker-dealer in which the
company has invested to enhance the broker-dealer's profitability or to
assist it during financial difficulty, even though that broker-dealer
may not offer the best price and execution. To preclude this type of
conflict, applicant and each Series agree, as a condition of this
application, that no company held in the portfolio of a Trust nor any
affiliate thereof will act as a broker for any Trust in the purchase or
sale of any security for its portfolio. In light of the above,
applicant believes that its proposal meets the section 6(c) standards.
Applicant's Condition
Applicant and each Series agree that any order granted under this
application [[Page 20547]] may be conditioned upon no company held in a
Trust's portfolio nor any affiliate thereof acting as broker for any
Trust in the purchase or sale of any security for a Trust's portfolio.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-10223 Filed 4-25-95; 8:45 am]
BILLING CODE 8010-01-M