[Federal Register Volume 63, Number 76 (Tuesday, April 21, 1998)]
[Notices]
[Pages 19765-19769]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-10502]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23114; 812-10602]


NationsBanc Montgomery Securities LLC; Notice of Application

April 14, 1998.
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: NationsBanc Montgomery Securities LLC 
(``NationsBanc'') requests an order with respect to the Hybrid Income 
Trust Securities (``HITS'') trusts and future trusts that are 
substantially similar to the HITS trusts and for which NationsBanc 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 sections 
3(c)(1) and (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 NationsBanc at the time of a 
Trust's initial issuance of Securities.

FILING DATES: The application was filed on April 4, 1997. Applicant has 
agreed to file an amendment, the substance of which is incorporated in 
this notice, during the notice period.

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 
NationsBanc with a copy of the request, personally or by

[[Page 19766]]

mail. Hearing requests should be received by the SEC by 5:30 p.m. on 
May 7, 1998, and should be accompanied by proof of service on 
NationsBanc, 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. 
NationsBanc, 9 West 57th Street, New York, New York 10019.

FOR FURTHER INFORMATION CONTACT:
Brian T. Hourihan, Senior Counsel, at (202) 942-0526, or Mary Kay 
Frech, 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, 450 Fifth Street, NW., Washington, 
DC 20549 (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. NationsBanc will serve as a principal 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,\1\ 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 NationsBanc. 
The investment objective of each Trust will be to provide to each 
holder of Securities (``Holder'') (i) current 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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    \1\ 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.\2\ 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.\3\
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    \2\ 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.
    \3\ 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 Trust 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. NationsBanc 
currently intends, but will not be obligated, to 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 
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. The 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 NationsBanc or 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 a default 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 defaults 
provided for in the Contract, the obligations of the counterparty under 
the Contract will be accelerated and the available proceeds of the 
Contract will be distributed to the Security Holders.
    7. The trustees of each Trust will be selected initially by 
NationsBanc, 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 all 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'' \4\ 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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    \4\ 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 with 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

[[Page 19767]]

expenses will not be borne by the Holders, but rather, directly or 
indirectly, by NationsBanc, 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 NationsBanc).

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 excepted 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)(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 that, the exemption is consistent with the public 
interest and protection of investors.
    3. NationsBanc believes, in order for the Trusts to be marketed 
most successfully, and to be traded at a price that most accurately 
reflects their value, that it is necessary for the Securities of each 
Trust to be offered to large investment companies and investment 
company complexes. NationsBanc states that these investors seek to 
spread the fixed costs of analyzing specific investment opportunities 
by making sizable investments in those opportunities. Conversely, 
NationsBanc 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 ultimately be 
permitted to purchase is immaterial in light of the total assets of the 
investment company or investment company complex. Therefore, 
NationsBanc 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). NationsBanc requests that the 
SEC issue an order under section 12(d)(1)(J) exempting the Trusts from 
the limitations.
    4. NationsBanc 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. NationsBanc 
also states that section 12(d)(1) was intended to address the layering 
of costs to investors.
    5. NationsBanc believes 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, NationsBanc 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. NationsBanc also believes 
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. NationsBanc believes 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 because generally these fees and expenses 
will be borne, directly or indirectly, by NationsBanc 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. NationsBanc 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 NationsBanc, 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. NationsBanc believes 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, NationsBanc 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. NationsBanc 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 in eligible trust 
securities shall be exempt from the net worth requirement, provided 
that the trust holds at least $100,000 of eligible trust securities at 
the commencement of a public offering.
    2. NationsBanc argues that, while the Trusts are classified as 
management companies, they have the characteristics of unit investments 
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 and disclosed portfolio that is held 
until maturity. NationsBanc 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

[[Page 19768]]

ongoing commitment on the part of the underwriter.
    3. NationsBanc 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, NationsBanc 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. NationsBanc 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. NationsBanc requests that the SEC issue an 
order under section 6(c) exempting the Trusts from the requirements of 
section 14(a). NationsBanc 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 NationsBanc.
    2. Section 17(b) of the Act provides 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. NationsBanc requests an exemption from sections 
17(a) (1) and (2) to permit the Trusts to purchase Treasuries from 
NationsBanc.
    3. NationsBanc 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. NationsBanc 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. NationsBanc 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. NationsBanc 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. NationsBanc 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. 
NationsBanc 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.
    5. NationsBanc 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

    NationsBanc 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 are 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 NationsBanc, 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 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 
NationsBanc 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

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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 Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-10502 Filed 4-20-98; 8:45 am]
BILLING CODE 8010-01-M