Warburg Dillon Read LLC; Notice of Application

[Federal Register Volume 64, Number 42 (Thursday, March 4, 1999)]
[Notices]
[Pages 10507-10510]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-5294]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23718; 812-11478]


Warburg Dillon Read LLC; Notice of Application

February 25, 1999.
agency: Securities and Exchange Commission (``Commission'' ''or SEC'').

action: Notice of application for an order under section 12(d)(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: Warburg Dillon Read LLC (``Warburg'') requests 
an order with respect to the T-REX securities trusts (``T-REX Trusts'') 
\1\ and future trusts that are substantially similar to T-REX Trusts 
for which Warburg 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 section 3(c)(1) or (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 
(ii) permit the Trusts to purchase U.S. government securities from 
Warburg at the time of a Trust's initial issuance of Securities.

    \1\ ``T-REX'' is a acronym for Trust-Issued Required Equity 
Exchange Securities.
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filing date: The application was filed on January 22, 1999.

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 Warburg 
with a copy of the request, personally or by mail. Hearing requests 
should be received by the SEC by 5:30 p.m. on March 22, 1999, and 
should be accompanied by proof of service on Warburg, 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. 
Applicant, 299 Park Avenue, New York, New York 10171.

for further information contact: Bruce R. MacNeil, Staff Attorney, at 
(202) 942-0634, 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. 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. Warburg 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,\2\ 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 Warburg. The 
investment objective of each Trust will be to provide to each holder of 
Securities (``Holder'') (i) periodic 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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    \2\ 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.\3\ 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.\4\
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    \3\ 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.
    \4\ 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 National Market System. 
Thus, the Securities will be ``national market system'' securities 
subject to public

[[Page 10508]]

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. Warburg 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 or banks 
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. Any such 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 Warburg or 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 
or only upon the occurrence of certain events 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 events provided for the Contract, the obligations of the 
counterparty under the Contract may be accelerated and the available 
proceeds of the Contract will be distributed to the Holders.
    7. The trustees of each Trust will be selected initially by 
Warburg, 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 or 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'' \5\ 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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    \5\ 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 
Trusts 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 expenses will not be borne by the Holders, but rather, directly 
or indirectly, by Warburg, 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 then the 
Trust itself (which party may be Warburg).

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) 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. Warburg states that, in order for the Trusts to be marketed most 
successfully, and to be traded at a price that most accurately reflects 
their value, it is necessary for the Securities of each Trust to be 
offered to large investment companies and investment company complexes. 
Warburg states that these investors seek to spread the fixed costs of 
analyzing specific investment opportunities by making sizable 
investments in those opportunities. Conversely, Warburg 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, Warburg argues that these investors should 
be able to acquire Securities in each Trust in excess of the 
limitations imposed by section 12(d)(1)(A)(i) and 12(d)(1)(C). Warburg 
requests that the SEC issue an order under section 12(d)(1)(J) 
exempting the Trusts from the limitations.
    4. Warburg 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. Warburg also states that 
section 12(d)(1) was intended to address the layering of costs to 
investors.
    5. Warburg asserts 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, Warburg 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. Warburg also states that the concern about undue 
influence through a threat to redeem does not case 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. Warburg states

[[Page 10509]]

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 Warburg 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. Warburg 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 
Warburg, 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. Warburg asserts that the investment product offered by the 
Trusts serves a valid business people. 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, Warburg 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 States at the time of the issuance of the Securities.
    8. Warburg 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. Warburg 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. Warburg 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 ongoing commitment on the part of the 
underwriter.
    3. Warburg 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, Warburg 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. Warburg 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. Warburg requests that the SEC issue an order 
under section 6(c) exempting the Trusts from the requirements of 
section 14(a). Warburg 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 Warburg.
    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 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. Warburg requests an exemption 
from sections 17(a)(1) and (2) to permit the Trusts to purchase 
Treasuries from Warburg.
    3. Warburg 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 from securities. Warburg 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. Warburg 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. Warburg states that it only is 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. Warburg 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. Warburg 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

[[Page 10510]]

in the amount that they would be paid on the Contracts.
    5. Warburg 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

    Warburg 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 Warburg, 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 Warburg 
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 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. 99-5294 Filed 3-3-99; 8:45 am]
BILLING CODE 8010-01-M