[Federal Register Volume 63, Number 115 (Tuesday, June 16, 1998)]
[Notices]
[Pages 32902-32905]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15891]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23247; 812-10888]


PaineWebber Incorporated; Notice of Application

June 9, 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), under section 6(c) of the Act for an exemption from 
section 14(a), 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: PaineWebber Incorporated (``PaineWebber'') 
requests an order with respect to Exchangeable Securities Trusts and 
future trusts that are substantially similar and for which PaineWebber 
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 PaineWebber at 
the time of a Trust's initial issuance of Securities.

FILING DATES: The application was filed on December 5, 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 
PaineWebber with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on July 1, 1998, 
and should be accompanied by proof of service on PaineWebber, 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. PaineWebber, 1285 Avenue of the Americas, 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 
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. PaineWebber 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 
dissolution. The Trusts will purchase the Contracts from

[[Page 32903]]

counterparties that are not affiliated with either the relevant Trust 
or PaineWebber. 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 
dissolution 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 Trusts will be listed on a national 
securities exchange or traded on The Nasdaq Stock Market's National 
Market. 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. 
PaineWebber 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, 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 the bank.
    6. The Trusts will be structured so that the trustees are not 
authorized to sell the Contracts or Treasuries under any circumstances. 
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, 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 
PaineWebber, 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 dissolved.
    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 PaineWebber, 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 PaineWebber).

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 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) 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. PaineWebber 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. PaineWebber states that these investors seek to 
spread the fixed costs of analyzing specific investment opportunities 
by making sizable investments in those opportunities. Conversely, 
PaineWebber asserts that it may not be economically

[[Page 32904]]

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, PaineWebber 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). PaineWebber requests that 
the SEC issue an order under section 12(d)(1)(J) exempting the Trusts 
from the limitations.
    4. PaineWebber 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. PaineWebber 
also states that section 12(d)(1) was intended to address the layering 
of costs to investors.
    5. PaineWebber 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, PaineWebber 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. PaineWebber 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. PaineWebber 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 PaineWebber 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. PaineWebber 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 PaineWebber, 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. PaineWebber 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, PaineWebber 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.
    8. PaineWebber 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. PaineWebber argues that, while the Trusts are classified as 
management companies, they have 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.
    PaineWebber 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. PaineWebber 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, PaineWebber 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. PaineWebber 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. PaineWebber requests that the SEC issue an 
order under section 6(c) exempting the Trust from the requirements of 
section 14(a). PaineWebber believes that the exemption is appropriate 
in the public interest and consistent with the protection of investors 
and 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 PaineWebber.
    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

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policies of the registered investment company involved and the purposes 
of the Act. PaineWebber requests an exemption from sections 17(a)(1) 
and (2) to permit the Trusts to purchase Treasuries from PaineWebber.
    3. PaineWebber 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. PaineWebber 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. PaineWebber 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. PaineWebber 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. PaineWebber 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. 
PaineWebber 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. PaineWebber 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

    PaineWebber 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 to vote its Trust shares in 
proportion to the vote of all other Holders.
    2. The trustees of each Trust, including 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 PaineWebber, 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 not 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 
PaineWebber 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. 98-15891 Filed 6-15-98; 8:45 am]
BILLING CODE 8010-01-M