[Federal Register Volume 63, Number 75 (Monday, April 20, 1998)]
[Notices]
[Pages 19538-19542]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-10275]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23110; 812-10940]


Lehman Brothers Inc.; Notice of Application

April 13, 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: Lehman Brothers Inc. (``Lehman'') requests an 
order with respect to PIES Trust I and future trusts that are 
substantially similar and for which Lehman 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 Lehman at the time of a Trust's initial 
issuance of Securities.


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FILING DATES: The application was filed on December 31, 1998. 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 Lehman 
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 7, 1998, and should 
be accompanied by proof of service on Lehman, 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, N.W., Washington, D.C. 
20549. Lehman, 3 World Financial Center, New York, New York 10285.

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, N.W., Washington, 
D.C. 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. Lehman 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 Lehman. 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\ No Trust will hold Contracts relating to the Shares of more 
than one issuer.
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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 of 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 Trusts will be listed on a national 
securities exchange or traded on the Nasdaq Stock Market's National 
Markets. 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. Lehman 
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 any separate investment adviser. The trustees will have 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 paying agent, 
registrar, transfer agent, and collateral 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 Lehman 
or the bank.
    6. The Trusts will be structured so that the trustees are not 
authorized to sell the Contracts or Treasuries unless a default occurs 
under a Contract and the Contract is accelerated. The Trusts will hold 
the Contracts until maturity, 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 any other default 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 Lehman, 
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 fundamental 
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, and except as required by the Act, charter documents of the 
Trust or a rule of a national securities exchange, or a quotation 
system 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

[[Page 19540]]

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 expenses will not be borne by the Holders, but rather, directly 
or indirectly, by Lehman, 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 Lehman). Moreover, the bank's fee for 
acting as trustee, custodian, paying agent, registrar and transfer 
agent, and fees and expenses for acting as collateral agent will be 
paid by Lehman, who in turn will be reimbursed by the counterparties.

Applicant's Legal Analysis

A. Section 12(d)(1)

    1. Section 12(d)(1)(A)(i) of the Act prohibits any registered 
investment company from owning more than 3% of the total outstanding 
voting stock of any other investment company, and any investment 
company and any company or companies controlled by the 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 an 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) and (c)(7)(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. Lehman 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. Lehman states that these investors seek to spread the fixed 
costs of analyzing specific investment opportunities by making sizable 
investments in those opportunities. Conversely, Lehman 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, Lehman 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). Lehman 
requests that the SEC issue an order under section 12(d)(1)(J) 
exempting the Trusts from the limitations.
    4. Lehman 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. Lehman also states that 
section 12(d)(1) was intended to address the layering of costs to 
investors.
    5. Lehman 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, except upon the occurrence of an 
event of default provided for in a Contract, 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, Lehman argues that any concerns regarding undue 
influence will be eliminated by a provision in the charter documents 
for 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. Lehman 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. Lehman 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 Lehman 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. Lehman 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 
Lehman, the counterparties, or other third parties. Similarly, Lehman 
asserts that the fees of the bank for acting as trustee, paying agent, 
registrar, transfer agent, and collateral agent will borne directly by 
Lehman. 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.
    8. Lehman 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, Lehman asserts that 
the Securities are intended to provide Holders with an investment 
having unique payment and risk characteristics, including an 
anticipated higher yield than the ordinary dividend yield on the Shares 
at the time of the issuance of the Securities.
    9. Lehman 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

[[Page 19541]]

investing in eligible trust securities will 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. Lehman argues that, while the Trusts are classified as 
management companies, they have the characteristics of unit investment 
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. Lehman 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 ongoing commitment on the part of the 
underwriter.
    3. Lehman 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, and 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, Lehman 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. Lehman 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. Lehman requests that the SEC issue an order 
under section 6(c) exempting the Trusts from the requirements of 
section 14(a). Lehman 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 Lehman.
    2. Section 17(b) of the Act provides that 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. Lehman requests an exemption from sections 17(a) 
(1) and (2) to permit the Trusts to purchase Treasuries from Lehman.
    3. Lehman 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. Lehman 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. Lehman 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. Lehman 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. Lehman 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. Lehman 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. Lehman 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

    Lehman 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 Trust's charter documents 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 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 such 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 Lehman, setting forth a description of the 
Treasuries purchased, the identity of the seller, the terms of the 
purchase, and the information of 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 not involve 
overreaching of the

[[Page 19542]]

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 Lehman 
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 
determine that the price to be paid for, and the terms of, the 
transaction is 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. 98-10275 Filed 4-17-98; 8:45 am]
BILLING CODE 8010-01-M