SEC Division of Investment Management staff letter: Shearson Lehman Brothers Inc. and Smith Barney, Harris Upham & Co. Incorporated

PUBLIC
Our Ref. No. 93-4-ICR
RESPONSE OF THE OFFICE OF Shearson Lehman Brothers Inc. INVESTMNT COMPANY REGULATION and Smith Barney, Harris Upham DIVISION OF INVESTMENT MAAGEMENT & Co. Incorporated In your letter dated June 7, 1993, you state that on March

12 ( 1993, Shearson Lehman Brothers Inc. ( II Shearson II) entered an asset purchase agreement with Primerica Corporation and its

subs idiary, Smith Barney, Harris Upham & Co. Incorporated (II Smi th Barney II ). The agreement provides for the sale to Smith Barney and its designated affiliates of substantially all of the assets

of the Shears on Lehman Brothers Division and the SLB Asset Management Division of Shears on (the IITransaction"). You state that the registered investment companies sponsored

by Shears on (the II Funds II) have been granted orders exempting them from various provisions of the Investment Company Act of 1940. Certain of the orders that are essential to the continued operations of the Funds include as a named party Shearson (or one of its predecessors or affiliates) in its capacity as distributor or underwriter of the Funds. These orders (the IIExemptive Orders") contemplate the compliance by Shears on (or one of its

predecessors or affiliates) with certain undertakings and

conditions. ~I After consummation of the Transaction, however,

Smith Barney or one of its affiliates will serve as distributor

or underwri ter of the Funds.

You state that because the Transaction is structured as an

asset purchase, Smith Barney will not be acquiring the entity to

~I The Exemptive Orders are: Shears on Lehman Brothers

Appreciation Fund Inc., Investment Company Act Release Nos. 19176

(Dec. 22, 1992) (notice) and 19216 (Jan. 19, 1993) (order); Shears on Lehman Brothers Appreciation Fund Inc., Investment

Company Act Release Nos. 18770 (June 11, 1992) (notice) and 18832

on Lehman Brothers Income Trust,

Investment Company Act Release Nos. 18565 (Feb. 24, 1992)

(Jul. 7, 1992) (order); Shears

(notice) and 18623 (Mar. 23, 1992) (order); Shears on Lehman

Brothers Inc., Investment Company Act Release Nos. 18145 (May 14,

1991) (notice) and 18191 (June 11, 1991) (order); Shearson Lehman

Hutton Unit Trusts, Investment Company Act Release Nos. 16904

(Apr. 6, 1989) (notice) and 16940 (Apr. 27, 1989) (order); E.F. Hutton & Co., Investment Company Act Release Nos. 14182 (Oct. 5,
1984) (notice) and 14219 (Oct. 31, 1984) (order); E.F. Hutton &
Co., Investment Company Act Release Nos. 13733 (Jan. 20, 1984) (notice) and 13787 (Feb. 24, 1984) (order); Shearson Daily

Dividend Inc., Investment Company Act Release Nos. 13316 (June

10, 1983) (notice) and 13382 (July 13, 1983) (order); and

Shearson Daily Dividend Inc., Investment Company Act Release Nos. 11671 (Mar. 6, 1981) (notice) and 11716 (Apr. 3, 1981) (order).

• 2
  whom an Exemptive Order was issued. In addition, Smith Barney

has not formally undertaken to meet the conditions that may have

been imposed in the Exemptive Orders on that entity.

Accordingly i the Exemptive Orders may not be available to the

Funds and Smith Barney after consumtion of the Transaction 0 The Funds and Smith Barney therefore have agreed and intend

promptly to file applications (the IIRenewal Applications II) with

the Commission in which they would request exemptive orders

(IlRenewal Orders II) that would effectively continue the relief

previously granted in the Exemptive Orders.

You request assurance that the Division of Investment

Management will not recommend that the Commission take

enforcement action if the Funds and Smith Barney rely on the

Exemptive Orders pending receipt by the Funds of the Renewal

Orders 0 Smith Barney specifically agrees that, pending receipt

of the Renewal Orders
8 it will comply with the terms and

conditions in the Exemptive Orders imposed on Shearson (or one of

its predecessors or affiliates) as though such terms and

conditions were imposed directly on Smith Barney. The Funds

agree that they will rely on the Renewal Orders when they are

granted, rather than continuing to rely on the Exemptive Orders.

Based on the facts and representations contained in your

letter i we would not recommend that the Commission take

enforcement action against the Funds or Smith Barney if, pending

the issuance of the Renewal Orders, the Funds and Smith Barney

rely on the Exemptive Orders 0 In particular, we base our

position upon your representation that Smith Barney will comply

with the terms and conditions imposed upon Shears on (or one of

its predecessors or affiliates) as though such terms and

conditions were imposed directly on Smith Barney. This

assurance 8 however, is not a substitute for exemptive relief 0

Accordingly, this position shall be effective until the earlier

of the issuance by the Commission of the Renewal Orders, or one

year from the date of this letter.

This response expresses the Division iS position on enforcement action only i and does not purport to express any legal conclusions on the questions presented. Facts or conditions different from those presented in your letter might

require a different conclusion. Moreover i this letter provides

no assurance that the Commission will issue the Renewal Orders p

or that the staff will not comment upon or seek modification of

any Renewal Application.

~i~ 0 i ~"J\i ohn V. 0' Hanlon

taff Attorney

June 8, 1993

WILLKIE FARR& GALLAGHER New York
Washington, DC
London
Paris
1940 Act/Sections

2 (a) (19), 2 (a) (32), 2 (a) (35),

12(d) (1), 14 (a), 17 (b),

17(d), 18(f), 18(g),

18 (i), 22 (c), 22 (d) and

Rules 17d-1 and 22c-1
.....-.
: ""t d.f 1'l~D -"~

• ¡~:t10n I¡¡b~
  tnule lPub~l1(' Jeremy N. Rubenstein, Esq. ~ Assistant Director .. vallabllity Office of Investment Company Regulation " !P/9 il --." ~ J

Division of Investment Management

Securities and Exchange Commission

Judiciary Plaza

450 Fifth Street

Washington, D. C. 20549-1004

Re: Shearson Lehman Brothers Inc. and

Smith Barney, Harris Upham & Co. Incorporated

Dear Mr. Rubenstein:
On behalf of Shearson Lehman Brothers Inc. ("Shearson") and

Smith Barney, Harris Upham & Co. Incorporated ("Smith

Barney"), we request that the staff (the "Staff") of the

Division of Investment Management of the Securities and

Exchange Commission (the "Commission") advise us that it

will not recommend that the Commission take any enforcement

action under the Investment Company Act of 1940, as amended

(the "1940 Act"), under the circumstances described below.

In addition, the registered investment companies sponsored

by Shearson (the "Funds") and Smith Barney intend to file

applications with the Commission, which, if granted, would

continue existing exemptive relief previously granted by

the Commission.

Background
On March 12, 1993, Shearson entered into an asset purchase

agreement (the "Asset Purchase Agreement") with Primerica

Corporation ("Primerica") and its indirect, wholly owned

subsidiary, Smith Barney, providing for the sale to Smith

One Citicorp Center Telex: RCA 233780 153 East 53 rd Street RCA 238805 New York, NY 10022-4669 WU 12 7679 212 935 8000 Fax: 212 752 2991

Jeremy N. Rubenstein, Esq.

Commission

Barney and its designated affiliates of substantially all

of the assets of the Shearson Lehman Brothers Division of

Shearson and the SLB Asset Management Division of Shearson

(the "Transaction"). Upon the closing of the Transaction,

Shearson will receive, subject to adjustment, $850 million

in cash, $125 million in value of convertible preferred

stock of Primerica, $25 million in value of warrants to

purchase Primerica common stock, a three-year participation

in the revenues of the combined companies (with revenue

participation payments to Shearson limited to $50 million

per year) and a five-year 10% participation in the net

profits (in excess of $250 million) of the combined

companies.
The closing of the Transaction, scheduled for early July

1993, is subject to certain conditions, including the

condition that the new investment advisory contracts with

Smith Barney or an affiliate of Smith Barney shall have

been approved by (a) the Boards of Directors or Trustees

(the "Boards"), as the case may be, (i) of the registered

investment management companies sponsored by Shears on that are money market funds (each a "Money Fund" and

collectively, the "Money Funds") (subject to later

shareholder approval) and (ii) of the registered investment

management companies sponsored by Shearson other than the

Money Funds (the "Non-Money Funds"), including, in each

case a majority of the Board members who are not

"interested persons'" of the Money Funds or the Non-Money

Funds as defined under the 1940 Act ("Independent Board

Members"), and (b) shareholders of the Non-Money Funds

which, as of February 28, 1993, represented at least 75% of

all of the assets of such funds, upon terms virtually

identical with the investment advisory contracts of each

such fund currently in effect (other than changes in the

identity of the parties and the commencement and

termination dates of the contracts). In addition, the

closing of the Transaction is subject to the condition that

the Board, including a majority of Independent Board

Members, of each of the Money Funds and Non-Money Funds

shall have approved new underwriting, distribution or

dealer contracts, if any, with Smith Barney pursuant to

other requirements

applicable thereto contained in the 1940 Act. Shearson is

currently in the process of soliciting proxies from

shareholders of these funds for shareholder meetings

scheduled to be held on various dates during June 1993.

Section 15 of the 1940 Act and any

Jeremy N. Rubenstein, Esq.

Commission

The Exemptive Orders
Over time, the Funds have applied for, and been granted by

from various provisions

of the 1940 Act; Certain of these exemptive orders

(described in more detail below (the "Exemptive Orders"))

have included as named parties not only the Funds but also

Shearson (or one of its predecessors or affiliates) in its

capacity as distributor or underwriter of the Funds and

contemplate the performance by Shearson (or one of its

predecessors or affiliates) of certain conditions. After

consummation of the Transaction, it is contemplated that

the Commission, orders of exemption

Smith Barney or one of its affiliates, rather than Shears on (or one of its predecessors or affiliates), will serve a~

distributor or underwriter of the Funds. Since the

Transaction is structured as an asset purchase, Smith

Barney will not be acquiring the entity to whom an

Exemptive Order was issued, nor has Smith Barney formally

undertaken specifically to meet the conditions that may

have been imposed in the Exemptive Orders on that entity.

Accordingly, the Staff has advised that the Exemptive

Orders may not be available to the Funds and Smith Barney

after consummation of the Transaction. The Funds and Smith

Barney, therefore, have agreed and intend promptly to file

applications (the "Renewal Applications") with the

Commission in which they would request exemptive orders

("Renewal Orders") that would effectively continue the

exemptive relief previously granted to the Funds by the

Commission in the Exemptive Orders.

The following is a brief description of the Exemptive

Orders for which it is contemplated that Renewal

Applications would be filed: i lOur research indicates that since 1970 approximately 140 orders

have been issued to Shearson (or one of its predecessors or

affiliates). Of these orders, approximately 110 orders were issued

(a) to specific Funds that will remain in existence after consumtion of the Transaction; (b) in connection with deregistration under Section 8 (f) of the 1940 Act; (c) in connection

with disciplinary proceedings; and (d) with respect to specific transactions (e. g., relief under Section 17 of the 1940 Act for

mergers of funds in the Shearson family). Approximately 30 orders

name Shearson (or one of its predecessors) as a party and imposed

ongoing obligations on that party. With the exception of the

Exemptive Orders described in the accompanying text, however, these

orders are no longer necessary as a result of subsequently issued

exemptive orders, elimination of affiliations that necessitated

Jeremy N. Rubenstein, Esq.

Commission

1. Variable Pricinç. Investment Company Act

Release Nos. 19~16 (January 19, 1993) (order) and 19176

(December 22, 1992) (notice); Investment Company Act

Release Nos. 18832 (July 7, 1992) (order) and 18770 (June

11, 1992) (notice). Exemption from sections 2 (a) (32),

2 (a) (35), 18 (f), 18 (g), 18 (i), 22 (c) and 22 (d) of the 1940 Act and Rule 22c-1 thereunder relating to implementation of

multiple class distribution arrangements and establishment

of contingent deferred sales charges.

2 . Income Trust CDSC. Investment Company Act

Release Nos. 18623 (March 23, 1992) (order) and 18565

(February 24, 1992) (notice). Exemption from sections 2 (a) (32), 2 (a) (35), 22 (c) and 22 (d) of the 1940 Act and Rule 22c-1 thereunder relating to establishment of a

contingent deferred sales charges for Shearson Lehman

Brothers Income Trust.

3. Interested Person Relief. Investment Company

Act Release Nos. 13382 (July 13, 1983) (order) and 13316

(June 10, 1983) (notice) (Martin Brody); and Investment

Company Act Release Nos. 11716 (April 3, 1981) (order) and

11671 (March 6, 1981) (notice) (Judge James Crisona) . Exemption from section 2 (a) (19) relating to relief for the named individual from being deemed an "interested person" with respect to certain Funds for which the person was a director.
4. Shearson Sponsored Unit Investment Trusts.

Investment Company Act Release Nos. 18191 (June 11, 1991)

(order) and 18145 (May 14, 1991) (notice). Exemptive

relief pursuant to Section 11 (a) permitting certain offers

of exchange between the applicant Shears on sponsored unit investment trusts (the "UITs II) and pursuant to Section 6 (c) exempting Shearson and any other underwriters for the UITs from Section 14 (a) to the extent it would require them to take and hold for their own accounts or privately place at least $100,000 of units in each series of the UITs that do not hold exclusively "eligible trust securities" within the meaning of Rule 14a-3 (b) . relief or subsequent Commission rulemaking under the 1940 Act (i. e.,

Rule 11a-3 and Rule 2a-7).

Jeremy N. Rubenstein, Esq.

Commission

5. Shearson Unit Trusts. Investment Company Act

Release Nos. 16940 (April 27, 1989) (order) and 16904

(April 6, 1989), (notice). Relief pursuant to: (i) section 6 (c) exempting Shearson and the UITs from Section 12 (d) (1) to permit the UITs to invest in portfolios consisting of

zero-coupon obligations, from Section 14 (a) to exempt the UITs from the requirement that an investment company must have a net worth of $100,000 at the time of public offering of its securities, and from Section 22 (d) to permit the waiver of deferred sales loads under certain circumstances; and (ii) Section 17 (d) and Rule 17d-1 thereunder, approving certain affiliated transactions.
6. Hutton Telephone Trust. Investment Company Act

Release Nos. 14219 (October 31, 1984) (order) and 14182

(October 5, 1984) (notice); Investment Company Act Release

Nos. 13787 (February 24, 1984) (order) and 13733 (January

20, 1984) (notice). Relief pursuant to Sections 6 (c) and

17 (b) permitting Shearson, the sponsor of Hutton Telephone

Trust (the "Trust"), acting as principal, to purchase, at a

1% discount, securities from the Trust which the Trust

receives in accordance with its participation in a dividend

reinvestment plan.
Reliance on the Exemptive Orders is essential for the

continued operations of the Funds, and the Funds' counsel

has discussed with the Staff the possibility of filing a

no-action request which would permit the Funds and Smith

Barney to rely on the Exemptive Orders during the interim

period from the closing of the Transaction until the

Renewal Orders have been granted.

Analysis
The Funds and Smith Barney propose that, pending receipt of

the Renewal Orders, the Funds and Smith Barney would rely

on the Exemptive Orders and would be subject to those orders' terms and conditions. 2 Smith Barney specifically 2 In addition, where the ter. of the Exemptive Orders apply to

registered investment companies organized in the future that are in

the same "group of investment companies" (as defined in Rule 11a-3)

as the Funds or to future series of a UIT ("Future Funds"), it is

proposed that such Future Funds could rely on the Exemptive Orders,

subject to those orders' term and conditions, pending receipt of the

Renewal Orders.

Jeremy N. Rubenstein, Esq.

Commission

agrees that, pending receipt of the Renewal Orders, it will

comply with the terms and conditions in the Exemptive

Orders imposed on Shearson (or one of its predecessors or

affiliates) as though such terms and conditions were

imposed directlý on Smith Barney. The Funds agree that

they would rely on the Renewal Orders when they are '

granted, rather than continuing to rely on the Exemptive

Orders in accordance with any Staff no-action letter issued

in response to this request. The Funds further agree that

such Staff no-action position shall remain in effect only

until the earlier of (i) the date on which the appropriate

Renewal Order is issued or (ii) one year from the date of

the Staff's letter setting forth its no-action position.

We believe that the Funds should be permitted to continue

relying on the Exemptive Orders because the factors

supporting the issuance of those orders are still

applicable to the Funds even though the Funds will have a

different distributor after the Transaction. Moreover,

since, as described above, substantially all of Shearson' s

retail brokerage and asset management businesses are being

transferred to Smith Barney for consideration valued at

approximately $1 billion for valid business reasons, we do

not believe that a question can be raised that the

Transaction was occasioned by a desire on the part of Smith

Barney to acquire use of the Exemptive Orders.

The Staff previously has taken "no-action" positions in

similar situations involving various parties who sought to

continue to rely on exemptive orders despite changes in

circumstances similar to those involved here. 3 In

3 See The PNC Fund (April 2, 1993) (pending receipt of amended

order, investment company can rely on order granted to former

distributor); Cigna Funds Group (July 13, 1992) (investment companies

with a new sponsor can rely on exemptive order relating to deferred

compensation for non-interested trustees even though the order was

granted to their previous sponsor for investment companies sponsored

by such sponsor); Merrill Lynch Federal Securities Trust (Sept. 26,
1991) (investment company can rely on exemptive order permitting dual

distribution system without seeking to amend order even though order

did not originally apply to investment company); First Boston

Corporation (July 3, 1991) (newly created funding corporation can

rely on order exempting a substantially equivalent, but separate,

funding corporation from registration without seeking separate

order); Fiduciary Capital Partners, L.P. (Jan. 24, 1990)

(partnerships can rely on existing order without declaring

independent general partners not to be "interested persons" without

Jeremy N. Rubenstein, Esq.

Commission

addition, most of these "no-action" positions were not

limited to covering an interim period pending the receipt

of a comparable order.

Conclusion
For the reasons stated above, and, subject to the condition

that the Funds and Smith Barney will comply with the terms

and conditions of the Exemptive Orders pending receipt of

the Renewal Orders, we respectfully request that the Staff

advise that it will not recommend that the Commission take

enforcement action if the Funds and Smith Barney rely on

the Exemptive Orders pending receipt by the Funds of the

Renewal Orders.
We would greatly appreciate your assistance in expediting

this request. Should you have any questions regarding this

request, please contact the undersigned or Avi Katz of this

office at (212) 935-8000.

Very truly yours,

r
~~--~
Burton M. Leibert cc: Elizabeth G. Osterman, Esq.

John V. O'Hanlon, Esq.

seeking amended or new order despite subsequent replacement of

general partner; and Federated Investors, Inc. (Sept. 22, 1989)

(reorganized entities can rely on order that only applied to

predecessors) .