SEC Division of Trading and Markets no-action letter: Popular Total Return Fund, Inc.

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July 1, 2003

Ignacio Alvarez, Esq. Pietrantoni, Mendez & Alvarez, llp Banco Popular Center, Suite 1901 209 Munoz Rivera Avenue San Juan, Puerto Rico 00918

Re: Popular Total Return Fund, Inc.

Dear Mr. Alvarez:

In your letter dated June 30, 2003, on behalf of Popular Total Return Fund, Inc. ("Fund"), as supplemented by telephone conversations with the staff, you requested that the Division of Market Regulation ("Division") confirm that it would not recommend enforcement action to the Commission under Section 11(d)(1) of the Securities Exchange Act of 1934 ("Exchange Act") against broker-dealers participating in the distribution of the common stock of the Fund if they, directly or indirectly, extend or maintain or arrange for the extension or maintenance of credit on the common stock of the Fund to or for a customer who has owned the common stock for more than 30 days, in reliance on Rule 11d1-2 under the Exchange Act.

Based on the facts and representations set forth in your letter, and without necessarily concurring with your analysis, the Division would not recommend enforcement action under Exchange Act Section 11(d)(1) against broker-dealers participating in the distribution of the common stock of the Fund if they treat such stock as "securities issued by a registered open-end investment company" as that term is used in Exchange Act Rule 11d1-2.

In taking this position, we note your representations that the Fund is substantially similar to an open-end investment company registered under the Investment Company Act of 1940 ("Investment Company Act"), and its operation is consistent with the requirements of Sections 2(a)(32) and 22(e) of the Investment Company Act and Rule 22c-1 thereunder. In particular, you have represented that: (1) the Fund is an open-end investment company under the Investment Companies Act of Puerto Rico that is registered with and regulated by the Securities Division of the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico; (2) the Fund is exempt from registration with the Commission; (3) the Fund will be offered and sold exclusively to residents of Puerto Rico and entities with their principal office and principal place of business in Puerto Rico; (4) the Fund will offer and sell its common stock at a price equal to net asset value per share determined on a daily basis; (5) the common stock of the Fund is redeemable on a daily basis at a price equal to net asset value per share; and (6) the Fund will not suspend the daily right of redemption of Fund common stock except in the circumstances specifically set forth in your letter.

This position concerns enforcement action only and does not purport to express any legal conclusions about the issues presented in your letter. Moreover, any facts or conditions other than those presented in your letter may require a different response.

Sincerely,

Sean O'Malley Special Counsel

Incoming Letter

June 30, 2003

VIA FACSIMILE AND FEDERAL EXPRESS

Ms. Catherine McGuire Chief Counsel Division of Market Regulation Securities and Exchange Commission 450 Fifth Street, N.W. Washington. D.C. 20549

Re: Popular Total Return Fund, Inc.

Dear Ms. McGuire:

Popular Total Return Fund, Inc. (the "Fund") hereby requests that the staff of the Securities and Exchange Commission (the "SEC") grant no-action relief regarding Section 11(d)(1) of the Securities Exchange Act of 1934 (the "1934 Act") so that Popular Securities, Inc., a broker-dealer registered with the SEC and the NASD, Inc. (the "Distributor"), as the distributor of shares of common stock ("Common Stock") of the Fund, or any clearing broker used by the Distributor and other securities dealers that have entered into selected dealer agreements with the Distributor are permitted to, directly or indirectly, extend or maintain or arrange for the extension or maintenance of credit on the Common Stock to or for a customer who has owned the Common Stock for more than 30 days, as described more fully below.

The Fund seeks relief from Section 11(d)(1) of the Exchange Act pursuant to Rule 11d1-2 based on the Fund's similarity to a registered open-end company, as defined in the Investment Company Act of 1940 (the "1940 Act"). We note that the SEC staff has granted exemptive relief to the Fund from the prohibitions of Rule 102 of Regulation M based in part on the Fund's similarity to a registered open-end company. 1 We believe that the similar policy considerations that led the staff to grant that relief apply equally here.

1. Background

We have been advised of the following relevant facts by the Fund:

The Fund was organized on January 31, 2001 as a Puerto Rico corporation and is registered with the Securities Division of the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (the "Puerto Rico Commissioner") as a non-diversified, open-end investment company under the Investment Companies Act of Puerto Rico, Act No. 6 of October 19, 1954, as amended (the "Puerto Rico Act"). The offering and redemption of the Fund's Common Stock and the operation of the Fund is subject to the regulation of the Puerto Rico Commissioner. The Fund is exempt from registration under (1) the Securities Act of 1933 (the "1933 Act"), in reliance on the intrastate offering exemption provided by Section 3(a)(11) of the 1933 Act and Rule 147 thereunder, and (2) the 1940 Act in reliance on Section 6(a)(1) thereof.

As described more fully below, the Fund's Certificate of Incorporation provides that each holder of Common Stock can require the Fund to redeem the Common Stock at least annually, or more frequently as determined by the Board of Directors (the "Board"). Actually, the Board has adopted a policy whereby the Fund redeems its Common Stock on a daily basis.

The primary investment objective of the Fund is long term capital appreciation through investment in equity securities and, secondarily, current income through investment in fixed income securities. Under normal conditions, the Fund's investment adviser seeks to achieve the Fund's investment objective by investing at least 50% but not more than 80% of the Fund's total assets in equity securities. The balance of the Fund's total assets is invested by its investment adviser in fixed income securities. Under normal market conditions, the Fund may hold up to 5% of its total assets in cash or cash equivalent securities. In seeking to meet its investment objectives, the Fund's assets invested in equity securities are allocated from time to time by the Fund's investment adviser among the following categories of equity securities: (i) large capitalization U.S. stocks, (ii) stocks of foreign issuers, (iii) medium capitalization U.S. stocks, and (iv) small capitalization U.S. stocks. The Fund's actual allocation among these categories of stock is determined from time to time by the Fund's investment adviser according to its perception of the relative attractiveness of each category of investment. However, the Fund will never allocate more than 20% of its total assets to foreign stocks. Under normal market conditions, the Fund invests not less than 20% of the Fund's total assets in Puerto Rico Assets (as defined below). To date, the investment adviser of the Fund has pursued the Fund's investment objective by investing the portion of the Fund's assets allocated to equity securities in shares of exchange traded index funds instead of investing in individual stocks.

The Fund normally invests not less than 20% of the Fund's total net assets in the following types of debt and fixed income securities the interest on which will be taxable under the Puerto Rico Internal Revenue Code of 1994, as amended. ("Puerto Rico Assets"):

certificates of deposit of Puerto Rico banking institutions;

mortgage-backed securities backed by mortgage loans secured by real property located in Puerto Rico including, but not limited to, securities issued or guaranteed by the Government National Mortgage Association, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation and other collateralized mortgage obligations backed by Puerto Rico mortgage loans and Puerto Rico mortgage-backed securities;

asset-backed securities backed by assets located in Puerto Rico;

debt securities of corporations, partnerships or other entities organized under the laws of Puerto Rico which are actively engaged in business in Puerto Rico or debt securities of any such entities organized under the laws of a state or foreign jurisdiction that derive at least 80% of their gross income from Puerto Rico sources ("Puerto Rico Entities");

corporate debt obligations and preferred stock of Puerto Rico Entities;

reverse-repurchase agreements with Puerto Rico Entities; and

such other securities as the Puerto Rico Commissioner may determine by rule, regulation or ruling to constitute Puerto Rico assets for purposes of the Puerto Rico Act.

The Common Stock of the Fund is offered exclusively to individuals who have their principal residence in Puerto Rico and entities with their principal office and principal place of business in Puerto Rico and the Fund's prospectus so states. In addition, the Common Stock is sold, pledged, hypothecated or otherwise transferred only to Puerto Rico Residents.

2. Distribution Arrangement

The Distributor through its Puerto Rico branch has been appointed by the Board to act as the distributor of shares of Common Stock of the Fund. The Distributor has entered into selected dealer agreements with other securities dealers. Each, acting through its branch office in Puerto Rico, has distributed and will continue to distribute the Common Stock of the Fund in a continuous offering. The Fund has offered two classes of shares to the public. It may offer additional classes of shares in the future. Class A shares are sold to investors with an initial sales charge of up to 4.75% and are subject to a distribution fee at an annual rate of 0.25% of the average net assets of Class A shares. The Class B shares are sold without an initial sales charge and are subject to a distribution fee at an annual rate of 1.00% of the average net assets of Class B shares, but are available only to investors investing not more than $250,000. After the initial distribution period, shares have been sold continuously based on their net asset value next determined after a purchase order is received and becomes effective. 2

The Fund determines the net asset value per share of each class of its common stock daily after the close of regular trading on the NYSE (the "trade date") on each Business Day. 3 The Fund or the Distributor may suspend the continuous offering of the Fund's Common Stock at any time in response to conditions in the securities markets or otherwise and may thereafter resume such offering from time to time. Information concerning the Fund's net asset value is published in a newspaper of general circulation in Puerto Rico daily and from Bloomberg. Information concerning such net asset value is also available from the Fund as well as from the Distributor and selected dealers selling the Common Stock.

3. Redemptions

The Board has adopted a policy whereby the Fund accepts orders for redemption of any and all shares of the Fund daily on each Business Day. 4 Each holder of the Fund's Common Stock may present the stock to the Fund (or a person designated by the Fund) and will thereby be entitled (whether absolutely or only out of surplus) to receive approximately its proportionate share of the Fund's current net assets, or the cash equivalent thereof. In order for shares to be redeemed on a particular Business Day, the redemption order must be received by the Fund by the close of regular trading on the NYSE on such Business Day.

The Fund redeems the Common Stock from shareholders at a price per share equal to the net asset value per share determined after the close of regular trading on the NYSE on the redemption date less any applicable contingent deferred sales charges ("CDSC"). As a general matter, redemption orders are expected to settle on the third Business Day immediately following the trade date. Because there is no secondary market for the Fund's Common Stock, periodic redemptions are the only source of liquidity for holders of the Fund's Common Stock. 5

The redemption price for any Class B shares redeemed during the first six (6) years after purchase will be the net asset value per share minus any applicable CDSCs, which decline from 4.00% on redemptions made within 12 months of purchase to 0% for redemptions made more than six (6) years after purchase. The CDSC is designed to discourage short-term purchases and redemptions of Class B shares. In addition, the CDSC will be used to pay the Distributor in connection with its selling efforts. Purchases of Class A shares of $1.5 million which are not subject to an initial sales charge are subject to a contingent deferred sales charge of 1% if redeemed within 18 months after purchase.

The Fund will not suspend the right of daily redemption of Fund Common Stock, or postpone the date of payment or satisfaction upon redemption of Fund Common Stock for more than seven days after the tender of such stock to the Fund or its agent designated for redemption, except: (1) for any period during which the NYSE is closed other than customary week-end and holiday closings, or during which trading on the NYSE is restricted, or (2) for any period during which an emergency exists as a result of which disposal by the Fund of securities owned by it is not reasonably practicable, or it is not reasonably practicable for the Fund fairly to determine the value of its net assets.

4. Section (11)(d) and Rule 11d1-2 Analysis

Subject to certain exceptions, Section 11(d)(1), in its pertinent part, prohibits any person who both as a broker and a dealer transacts business in securities through the medium of a member or otherwise, to effect through the use of any facility of a national securities exchange or of the mails or of any means or instrumentality of interstate commerce, or otherwise in the case of a member, any transaction in connection with which, directly or indirectly, he extends or maintains or arranges for the extension or maintenance of credit to or for a customer on any security (other than an exempted security) which was part of a new issue in the distribution of which he participated as a member of a selling syndicate or group within 30 days prior to such transaction. Rule 11d1-2 provides an exemption from Section 11(d)(1) for securities issued by a registered open-end company, provided the person to whom the credit has been extended has owned the securities for more than 30 days.

The Fund is substantially similar to a registered open-end company. Section 5(a)(1) of the 1940 Act defines an "open-end company" as a management company which is offering for sale or has outstanding any redeemable security of which it is the issuer. Section 2(a)(32) of the 1940 Act defines "redeemable security" as any security, other than short-term paper, under the terms of which the holder, upon its presentation to the issuer or a person designated for the issuer, is entitled to receive approximately his proportionate share of the issuer's current net assets, or the cash equivalent thereof. Rule 22c-1 promulgated under the 1940 Act provides that the net asset value of redeemable securities shall be computed no less frequently than once daily. Section 22(e) of the 1940 Act prohibits a registered investment company from suspending the redemption of its securities except for the special circumstances set fourth in that Section. 6

The Common Stock issued by the Fund is a "redeemable security," as defined in Section 2(a)(32) of the 1940 Act. As described more fully above, each holder of the Fund's Common Stock can redeem the stock by presenting it to the Fund in order to receive approximately its proportionate share of the Fund's net assets, or the cash equivalent thereof. The Fund sells its shares each Business Day at the net asset value per share computed after the close of regular trading on the NYSE after the purchase orders are received, and it currently redeems its Common Stock each Business Day at net asset value also computed after the close of regular trading on the NYSE (less any applicable CDSC). The Fund will not suspend daily redemption of its Common Stock except for the specific circumstances set forth above in Section III of this letter. As such, the Fund's operation is consistent with the requirements of Sections 2(a)(32) and 22(e) of the 1940 Act and Rule 22c-1 thereunder.

No secondary market exists or is expected to develop for the Fund's Common Stock. A rationale for exempting the securities issued by a registered open-end-company from Section 11(d)(1), provided the person to whom the credit has been extended has owned the securities for more than 30 days, is that the prices at which the securities are sold and redeemed will be based on the net asset value of the securities. 7 The policies that underlie the exemption provided in Rule 11d1-2 for the securities of registered open-end-companies also support an exemption of shares of other investment companies that redeem their securities at net asset value per share on a daily basis.

V. Section 11(d)(1) Conclusion

The Fund is registered as an open-end investment company under the Puerto Rico Act and redeems its shares of Common Stock at net asset value on each Business Day. The Distributor and other securities dealers that have entered into selected dealer agreements with the Distributor, each acting through its branch office in Puerto Rico, have distributed and will continue to distribute the Common Stock of the Fund in a continuous offering.

We believe that the extension or maintenance or arrangement for the extension or maintenance of credit by the Distributor, any clearing broker of the Distributor or other securities dealers that have entered into selected dealer arrangements with the Distributor, on the Common Stock to or for a customer who has owned the Common Stock for more than 30 days will not involve the abuses that Section 11(d)(1) was intended to prevent. Based on the facts and circumstances described above, the Fund respectfully requests that the SEC staff grant the requested no-action relief from Section 11(d)(1) pursuant to Rule 11d1-2.

Please contact the undersigned at (787) 274-4911 with any questions you may have regarding this matter.

Very truly yours,

Ignacio Alvarez

#62354.2

Endnotes

See Popular Total Return Fund, Inc. letter, available March 13,2001.

During the continuous offering of shares of Common Stock of the Fund described above, the correction of errors or customer defaults on agreements to purchase shares may result in the Distributor holding such shares. The Distributor will hold these shares until they can be disposed of through redemptions, rather than allocating them to other purchasers.

The Fund's Prospectus defines "Business Day" as a day on which the New York Stock Exchange (the "NYSE") is open for trading.

The Fund has not, nor will it, list its shares of Common Stock on an exchange, arrange for over-the-counter trading on the NASDAQ system or any other electronic communications network, or arrange for the deposit of the Fund's shares of Common Stock in a depository. Thus, no secondary market exists, nor is expected to exist, for the Fund's Common Stock. In addition, the price at which shares of Common Stock are offered by the Fund does not promote the development of a secondary market. The price at which the Common stock will be offered is not determined at the discretion of the Fund or by the supply and demand for such shares. Instead, these prices will be based on the net asset value per share of the common stock and (in the case of Class A shares and any other class of shares that are issued in the future by the Fund) a pre-determined sales charge that is disclosed in the Fund's Prospectus.

In connection with the redemptions described above, the correction of errors relating to shares of Common Stock intended to be redeemed but erroneously treated as not redeemed may result in the Distributor holding Fund shares. Similar to the situation described in the second preceding footnote above, the Distributors will hold these shares of Common Stock until they can be disposed of through redemptions rather than allocating them to other purchasers.

See Section 22(e) of the Investment Company Act of 1940 [15 U.S.C. 80a 22(e)].

See Exchange Act Release No. 21577,(December 18, 1984), 49 FR 50172 (December 27, 1984) (stating the SEC's belief that "given the manner in which funds shares are priced, i.e., on the basis of their net asset value and not on the basis of the supply of, or demand for, shares, the fact that a broker-dealer is continuing to sell shares of a fund should not bar him from extending credit on shares of the fund which he has sold and which have been held by a customer for more than 30 days").

http://www.sec.gov/divisions/marketreg/mr-noaction/popular070103.htm

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Modified: 02/09/2005