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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230, 239, and 270
Release Nos. 33-7243; IC-21538; File No. S7-32-95
RIN 3235-AG63
Calculation of Yield by Certain Unit Investment Trusts
AGENCY: Securities and Exchange Commission.
ACTION: Proposed amendments to rules and forms.
SUMMARY: The Commission is proposing for public comment rule and
form amendments that would require certain unit investment trusts
("UITs" or "trusts") to use a uniform formula to calculate yields
quoted in their prospectuses, advertisements, and sales
literature. Use of the uniform formula by UITs is designed to
permit investors to assess more accurately the anticipated yield
from a UIT and to make comparisons of yields among UITs.
DATES: Comments on the proposed amendments should be received on
or before January 29, 1996.
ADDRESSES: Three copies of all comments should be submitted to
Jonathan G. Katz, Secretary, Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, D.C. 20549. All comment
letters should refer to File No. S7-32-95. All comments received
will be available for public inspection and copying in the
Commission's Public Reference Room, 450 Fifth Street, N.W.,
Washington D.C. 20549.
FOR FURTHER INFORMATION CONTACT: Anthony R. Bosch, Senior
Attorney, or Joseph E. Price, Deputy Chief, (202) 942-0721,
Office of Disclosure and Investment Adviser Regulation, Division
of Investment Management, Securities and Exchange Commission, 450
Fifth Street N.W., Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Securities and Exchange
Commission ("Commission") today is proposing for comment:
(1) Amendments to Form S-6 [17 CFR 239.16] under the
Securities Act of 1933 [15 U.S.C. 77a et seq.] (the "1933 Act"),
the form used by UITs to register securities under the 1933 Act,
that would standardize the computation of yield by certain UITs
in their prospectuses;
(2) Amendments to rule 482 [17 CFR 230.482] under the 1933
Act, together with the amendments to Form S-6, that would require
certain UITs including quotations of return in their
advertisements also to include a quotation of yield calculated in
accordance with the formula in Form S-6; and
(3) Amendments to rule 34b-1 [17 CFR 270.34b-1] under the
Investment Company Act of 1940 [15 U.S.C. 80a-1 et seq.] ("1940
Act") that would require certain UITs including quotations of
return in their sales literature also to include a quotation of
yield calculated in accordance with the formula in Form S-6.
EXECUTIVE SUMMARY
The Commission is proposing to adopt a uniform formula,
called the "Estimated Yield Formula," for the calculation of the
anticipated yield of UITs that invest substantially all of their
assets in fixed income securities ("Fixed Income UITs"). Under
the proposed rule and form amendments, a Fixed Income UIT would
be required to include in its prospectus a yield quotation
calculated pursuant to the Estimated Yield Formula ("Estimated
Yield"). A Fixed Income UIT that includes a quotation of yield,
or other similar quotation purporting to demonstrate the income
to be earned or distributions to be made by the UIT, in its
advertisements and sales literature would be required to include
and give equal prominence to its Estimated Yield. The proposed
amendments are intended to establish a uniform standard for
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calculating UIT yield to enhance the ability of prospective
investors to make informed investment decisions.
Table of Contents
I. BACKGROUND
II. DISCUSSION
A. Proposed Estimated Yield Formula
1. Sales Load
2. Compounding
3. Accrued Interest
4. Principal Account Cash Balances
5. Market Discount on Tax Exempt Securities
6. Preferred Stock, Asset-Backed Securities, and
Adjustable-Rate Securities
7. Units of Other Trusts
8. Tax Equivalent Yield
B. Scope of Application of the Proposed Estimated
Yield Formula
1. Prospectuses
2. Advertisements and Sales Literature
3. Secondary Market Sales
C. Alternative Formula
III. GENERAL REQUEST FOR COMMENTS
IV. COST/BENEFIT ANALYSIS
V. SUMMARY OF INITIAL REGULATORY FLEXIBILITY ACT
ANALYSIS
VI. PAPERWORK REDUCTION ACT
VII. TEXT OF PROPOSED RULE AND FORM AMENDMENTS
I. BACKGROUND
A UIT is a type of investment company that issues
securities, typically called "units," representing undivided
interests in a relatively fixed portfolio of securities.-[1]-
UITs are typically sponsored by broker-dealers, which assemble
the UIT's portfolio securities, deposit the securities in a
trust, and sell units of the UIT in a public offering. Unlike a
mutual fund, a UIT does not have a board of directors or an
investment adviser and its portfolio is not actively managed.
UIT units are redeemable securities that entitle an
investor to receive his or her proportionate share of the UIT's
net assets upon redemption. Notwithstanding this characteristic
of UIT units, most UIT sponsors voluntarily maintain a secondary
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--------- FOOTNOTES ---------
-[1]- Section 4(2) of the 1940 Act [15 U.S.C. 80a-4(2)]
defines a UIT as an investment company which (A) is
organized under a trust indenture, contract of
custodianship or agency, or similar instrument, (B)
does not have a board of directors, and (C) issues only
redeemable securities, each of which represents an
undivided interest in a unit of specified securities.
See generally Harman, Emerging Alternatives to Mutual
Funds: Unit Investment Trusts and Other Fixed Portfolio
Investment Vehicles, 1987 Duke L.J. 1045 (1987).
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market for units of the UITs they sponsor.-[2]- This secondary
market reduces the frequency with which trusts are forced to
liquidate as a result of unitholder redemptions.
UITs currently have approximately $74 billion in aggregate
assets, most of which (88 percent) are held by Fixed Income
UITs.-[3]- In marketing Fixed Income UITs to investors, sponsors
and broker-dealers typically quote a rate of return that
estimates the income that an investor who holds a unit for the
expected life of the UIT can anticipate receiving. This method
of marketing Fixed Income UITs is similar to the manner in which
individual bonds are marketed to investors based on a bond's
"yield to maturity,"-[4]- and may be contrasted to mutual fund
performance marketing, which is based exclusively on the past
performance of the mutual fund.-[5]- The prominence of the
anticipated income rate to the investment decisions of UIT
investors makes it particularly important that the rate is
uniformly and accurately calculated.
Before 1989, estimated current return ("ECR") was the
performance measurement used by Fixed Income UITs. The ECR of a
trust is calculated by dividing the trust's annual interest
income per unit (net of expenses) by the offering price per
unit.-[6]- While a trust's ECR is a reasonably accurate measure
of anticipated cash flows from a unit, it does not take into
account the full effect of bonds in a trust's portfolio that are
trading at a market discount or premium in the same manner as the
yield to maturity of a bond. As a result, the ECR of a Fixed
Income UIT comprised of premium bonds may overstate the return
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-[2]- Sponsors that maintain secondary markets in the shares
of the UITs they sponsor are considered issuers under
section 2(4) of the 1933 Act [15 U.S.C. 77b(4)] and
must comply with the registration requirements of the
1933 Act for units they offer to the public. In
addition, under section 24(d) of the 1940 Act [15
U.S.C. 80a-24(d)], a broker-dealer selling UIT shares
in the secondary market must comply with section 5(b)
of the 1933 Act [15 U.S.C. 77e(b)] if the sponsor is
continuing to sell shares in the trust.
-[3]- Source: Investment Company Institute. Tax-free debt
securities represent approximately $57 billion (89
percent) of the securities held by Fixed Income UITs.
Id.
-[4]- Yield to maturity is the discount rate that equates the
present value of future promised cash flows from the
security to the current market price of the security.
See W. Sharpe, Investments, 1028 (5th ed. 1995).
-[5]- See Item 22(b) of Form N-1A under the 1940 Act [17 CFR
274.11A], which specifies the manner in which mutual
funds calculate yield and total return. Investment
Company Act Rel. No. 16245 (Feb. 2, 1988) [53 FR 3868
(Feb. 10, 1988)] (adopting amendments to rule 482 and
other rules to standardize the calculation of mutual
fund performance).
-[6]- ECR is analogous to "current yield," a method of
quoting yield on an individual bond based on the amount
of annual income an investor will earn if the bond is
purchased today, as a percentage of today's price. See
W. Sharpe supra note 4 at 1006.
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that may be reasonably anticipated over the life of the
trust.-[7]-
ECR was developed at a time when interest rates were fairly
stable and UIT sponsors bought and deposited bonds at par. In
the 1970s, interest rates became more volatile,-[8]- and in the
1980s the practices of some UIT sponsors began to change. In
1989, the Commission's staff became aware that some UITs proposed
to invest a significant portion of their assets in premium
bonds.-[9]- In response to concerns expressed by the staff that
the quotation of ECR by such trusts could mislead prospective
investors, the UIT industry developed a formula, the estimated
long-term return ("ELTR") formula,-[10]- as a solution to ECR's
limitations.-[11]- ELTR is calculated by averaging the yields to
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-[7]- For example, a Fixed Income UIT consisting of bonds
that, at the time of deposit, were trading at 10%
premium to their par value, paying a 5% interest coupon
every six months, and maturing in ten years, would have
an ECR of 9.09% (assuming no sales load or expenses).
If, however, a unitholder holds the units until
maturity, the unitholder's return would be 8.5%. The
lower rate reflects that the 10% premium would not be
recovered by the unitholder when the UIT matures.
-[8]- From 1970 to 1980 interest rates on six-month treasury
securities ranged from 5.25% in 1976 to 11.43% in 1980.
See Statistical Abstracts of the United States, U.S.
Department Commerce, 522-23 (1981) (based on annual
averages of monthly data for interest rates between
1970 and 1980). In the 1980s, interest rates on six-
month treasury securities ranged from 13.81% in 1981 to
6.02% in 1986. See Statistical Abstracts of the United
States, U.S. Department Commerce, 525 (1994) (based on
annual averages of monthly data for interest rates
between 1980 and 1990).
-[9]- The staff became aware of these UITs during its routine
review of pre-effective offerings. Several articles in
the financial press also raised questions whether ECR
was an appropriate measure of yield for a UIT that held
significant investments in premium bonds. See e.g.,
Weberman, Doesn't Honesty Sell? Forbes, Oct. 16, 1989,
at 297.
-[10]- In 1989, an ad hoc committee of UIT sponsors, formed to
study the calculation of UIT yield, submitted to the
Commission a proposed uniform UIT yield formula.
Letter from James J. Wesolowski, Vice President and
General Counsel, John Nuveen & Co. Inc., to Robert E.
Plaze, Special Counsel, Division of Investment
Management (Apr. 11, 1989). Subsequently, the
Investment Company Institute submitted a revised UIT
yield formula. Letter from David Silver, President,
Investment Company Institute, to Kathryn B. McGrath,
Director, Division of Investment Management (Dec. 7,
1989). A copy of each letter is contained in File No.
S7-32-95.
-[11]- At the time, the Commission's Division of Investment
Management adopted a policy of not exercising its
delegated authority to accelerate the effectiveness of
any UIT registration statement the prospectus of which
(continued...)
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maturity of the bonds held by a UIT, giving weight to the period
remaining to maturity of each bond and the percentage of the
UIT's portfolio that consists of each bond. Because yield to
maturity reflects any premium or discount at which a bond may be
trading, ELTR addressed the primary limitation of the ECR formula
and the concerns of the staff.
Since 1989, the UIT industry and the Commission's staff have
held discussions to develop a permanent UIT yield formula. In
March of this year, the Investment Company Institute ("ICI")
submitted to the Commission a rulemaking proposal to standardize
the calculation of UIT yield based on a revised ELTR
formula.-[12]- The revisions primarily were intended to address
deficiencies in the application of the ELTR formula to trusts
with short-term termination dates (or trusts that are likely to
terminate in the near future due to bonds in the trust's
portfolio being called). The Division of Investment Management,
in a letter to the ICI, stated that it would not object to the
use of the ELTR formula, revised in accordance with the ICI's
proposal, until the Commission adopts rule and form amendments
concerning a uniform yield formula for UITs.-[13]-
II. DISCUSSION
The Commission is now proposing to adopt rule and form
amendments to codify a uniform method for the calculation of
yield by UITs. The proposed Estimated Yield Formula is based
largely on the ELTR formula but, as suggested by the ICI's most
recent submission and described in more detail below, would
include an adjustment that would require a trust that charges a
sales load to reflect the amortization of the load based on the
weighted-average expected life of the trust's portfolio
securities. The proposed Estimated Yield Formula would be used
to determine the yield of newly offered trusts, as well as for
trusts the units of which trade in a secondary market.
A. Proposed Estimated Yield Formula
Under the proposed Estimated Yield Formula, a Fixed Income
UIT would calculate its Estimated Yield by first calculating the
average yield to maturity, weighted by market value and time to
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-[11]-(...continued)
disclosed the UIT's ECR unless the prospectus also
contained the UIT's ELTR. See letter to Registrants
from Carolyn B. Lewis, Assistant Director, Division of
Investment Management (Jan. 11, 1990). Subsequent to
the Division's 1990 letter, the Directors of the
Divisions of Market Regulation and Investment
Management sent a letter to UIT sponsors and broker-
dealers that are active in the UIT secondary market
stating that quotations of a UIT's ECR should be
accompanied by a quotation of the UIT's ELTR, if the
ECR varies materially from the estimated long-term
return of the trust. Letter from Marianne K. Smythe,
Director, Division of Investment Management, and
William H. Heyman, Director, Division of Market
Regulation (Apr. 8, 1992). A copy of each letter is
contained in File No. S7-32-95.
-[12]- See letter from Craig S. Tyle, Vice President and
Senior Counsel, Investment Company Institute, to Robert
E. Plaze, Assistant Director, Division of Investment
Management (Mar. 24, 1995). A copy of this letter is
contained in File No. S7-32-95.
-[13]- Investment Company Institute, (pub. avail. Aug. 2,
1995).
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maturity, of its portfolio securities, reducing this yield by
trust expenses (expressed as a percentage), and multiplying the
remainder by a percentage representing the net amount of the
trust's offering price that is invested.-[14]- The proposed
Estimated Yield Formula would then require a Fixed Income UIT to
reduce the resulting ratio by a "sales charge factor" to reflect
the "cost" to a UIT investor of not receiving upon termination of
the trust (or upon sale or redemption of the units or partial
liquidation of the trust) the portion of the amount initially
invested that represents sales load. Thus, the proposed
Estimated Yield Formula would not only reflect premiums or
discounts on portfolio securities, but also the "premium" an
investor who is charged a sales load pays for the units.
1. Sales Load
a. Front-End Sales Loads. Most investors in an initial
offering of a UIT pay at the time of purchase a sales load
("front-end" sales load) calculated as a percentage of the public
offering price.-[15]- Although the ELTR formula currently being
used reflects that a portion of the offering price representing
sales load will not be invested (and thus will not earn interest
for the unitholder), it does not amortize sales load to reflect
the effect on investor return of not receiving the sales load at
the termination of the trust or redemption of the units. This
limitation has the greatest effect for yield calculations
involving short-term trusts and trusts that are likely to
terminate in the near term due to bonds in the portfolio being
called.-[16]- In attempting to deal with this limitation, the
proposed Estimated Yield Formula would require Fixed Income UITs
to amortize sales load to reflect more accurately the effect of
sales load on investor return.
Under the proposed formula, a Fixed Income UIT would
amortize sales load over a time period ("amortization period")
determined by averaging the "expected lives" of the bonds in the
trust weighted by market value.-[17]- The expected life of most
bonds in the portfolio would be determined by each bond's
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-[14]- This last step reflects that a portion of the offering
price will be deducted in the form of a sales load and
thus, will not be invested and earn income for the
unitholder. As discussed infra section II.A.1. of this
Release, this step does not, however, reflect the
effect on investor return that the amount of the sales
load will not be returned to the investor at the
termination or redemption of the trust.
-[15]- Some UITs, pursuant to a Commission exemptive order,
have implemented deferred or installment loads. See
discussion infra section II.A.1.b.
-[16]- For example, assuming the trust in supra note 7 charged
a 4.8% sales load and matured in five years, the ELTR
of the trust would be 8.09%, although the investor's
actual return would be 6.34%.
-[17]- Instruction 8 to the proposed Estimated Yield Formula.
For purposes of simplification, proposed amendments to
rule 482, (requiring disclosure in trust advertisements
and sales literature), would refer to the expected life
of each bond in the trust as the "expected life of the
trust." Proposed rule 482(f) under the 1933 Act [17
CFR 230.482(f)].
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maturity date.-[18]- To account for the possibility of an early
redemption of the bonds, however, the proposed Estimated Yield
Formula would require trusts to calculate the expected life of a
bond with call features by comparing the bond's yield to maturity
to the bond's yield to "worst" call (the call feature to which
the bond is priced that would result in the bond's lowest
yield).-[19]- A bond's worst call date would be used if the
bond's yield to maturity exceeds its yield to worst call by more
than 40 basis points.-[20]-
The Commission considered requiring, as an alternative
method of determining the amortization period, the use of the
weighted average of each bond's worst call date as the expected
life of the trust. In its submission, the ICI explained that
this alternative may underestimate the life of a bond (and thus,
the expected life of the trust), particularly when transaction
costs would make many refundings economically infeasible.-[21]-
Because the likelihood of a bond being called depends in large
part on whether the refunding will provide sufficient savings to
the issuer, the ICI stated that the "spread" between a bond's
yield to maturity and its yield to call would provide an
appropriate measure for determining a bond's expected life -- the
greater the savings for the issuer, the more likely the bond will
be called.
The Commission also considered an alternative that would
require the amortization period to be determined by the expected
life of the trust. The Commission is not proposing this method
because such a method would permit a trust sponsor to lengthen
the amortization period by including one long-term bond in a
trust consisting of bonds that have much shorter
maturities.-[22]- Moreover, such a method would appear not to
reflect accurately the effect on investor return of an early
partial or complete liquidation of the trust and, thus, would
result in an amortization period that is too long. In the same
way sales load affects yield on an investment in a short-term
trust more than an investment in a long-term trust, a
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-[18]- The maturity date is the date upon which the principal
of a debt security becomes due and payable to the
securityholder. See Glossary of Municipal Securities
Terms, Municipal Securities Rulemaking Board, (Adapted
from the State of Florida's Glossary of Municipal Bond
Terms) (1985).
-[19]- Rules adopted by the Municipal Securities Rulemaking
Board ("MSRB") require that, when confirming customer
orders, yield be calculated to the lowest yield to
call, yield to par option, or yield to maturity ("yield
to worst"). This assures that an investor will
realize, at a minimum, the stated yield, even in the
event that a call provision is exercised. MSRB Rule G-
15(a)(i)(I), MSRB Manual (CCH) 3571.
-[20]- Maturity date would be used to determine the expected
life of any bond priced at par or at a discount and for
any bond priced at a premium if the bond's yield to
maturity does not exceed the bond's yield to worst call
by more than 40 basis points (.4%).
-[21]- See letter from Craig S. Tyle, Vice President and
Senior Counsel, Investment Company Institute, supra
note 12.
-[22]- Id.
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unitholder's yield from an investment in a long-term trust will
be affected if a portion of the investment is returned before
maturity. To account for these effects, under the proposed
formula, sales load would be amortized over the time each dollar
of a unitholder's investment can be expected to remain invested,
assuming the unitholder does not sell or redeem trust units
before termination of the trust.
The proposed Estimated Yield Formula would amortize the
sales load over the amortization period using a method designed
to reduce annual yield by an amount equal to a stream of future
annual payments that equate to the amount of the front-end sales
load. Comment is requested on the proposed Estimated Yield
Formula's method of amortization of sale load and, specifically,
on alternative methods that might reflect more accurately the
effect of sales load on investor return. Comment is requested on
an alternative method that would require sales load to be
amortized by treating the load as an additional premium in a
bond's yield to maturity calculation. This alternative would
require a trust to calculate each bond's yield to maturity by
adding to the price of the security an amount equal to the
security's pro rata portion of the sales load weighted by the
security's market value.-[23]- In addition, comment is requested
on a straight-line amortization method (i.e., dividing the sales
load by the amortization period) and whether this alternative
would provide a simpler method for amortizing sales load.
b. Deferred Sales Loads. The Commission has issued several
exemptive orders permitting UITs to impose sales charges on units
on a deferred basis.-[24]- Under the terms of the exemptions, a
UIT sponsor determines the maximum sales charge per unit at the
time portfolio securities are deposited in a trust, and the sales
charge is paid by the unitholder in installments over a period
following the purchase of the units.-[25]- The proposed
Estimated Yield Formula would require Fixed Income UITs to use
the maximum sales load, determined by the sponsor at the time of
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-[23]- Under this alternative, the portfolio's weighted
average yield to maturity would not be reduced by
multiplying the yield by a percentage representing the
net amount of the trust's offering price that is
invested.
-[24]- See Merrill Lynch, Pierce, Fenner & Smith, Inc.,
Investment Company Act Rel. Nos. 13801 (Feb. 29, 1984)
[49 FR 8512 (Mar. 7, 1984)]; 13848 (Mar. 27, 1984) [30
SEC Docket 192]; 15120 (May 29, 1986) [51 FR 20389
(June 4, 1986)]; and 15167 (June 24, 1986) [35 SEC
Docket 1735]. PaineWebber, Inc., Investment Company
Act Rel. Nos. 20755 (Dec. 6, 1994) [59 FR 64003 (Dec.
12, 1994)]; and 20819 (Jan. 4, 1995) [58 SEC Docket
1586].
-[25]- Id. The installments are paid from the distributions
of the trust until the maximum sales charge is
collected. If distribution income is insufficient to
pay a deferred sales charge installment, the trustee,
under the terms of the trust indenture, will sell
portfolio securities in an amount necessary to provide
the requisite payments. If a unitholder redeems or
sells to the sponsor his or her units before the total
sales charge has been collected from installment
payments, the balance of the sales charge may be
collected at the time of the redemption or sale.
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deposit, for calculating Estimated Yield of trusts whose
unitholders pay a deferred or installment load.-[26]-
2. Compounding
The proposed Estimated Yield Formula would omit a step
proposed by the ICI in which a trust's average yield to maturity
is divided by twelve and re-annualized using a method that, in
effect, would compound a monthly yield. The Commission is
concerned that such a calculation could materially overstate the
anticipated yield of a trust and is not proposing to provide for
compounding of a trust's average yield to maturity.
In its request for rulemaking and in other correspondence
with the staff, the ICI has argued that Fixed Income UITs
primarily compete with mutual funds.-[27]- Mutual funds
calculate yield according to a Commission formula that
effectively compounds earnings.-[28]- The ICI believes that
Fixed Income UITs also should be permitted to compound earnings
or they would be placed at a competitive disadvantage to mutual
funds.-[29]-
The compounding element of the mutual fund yield formula
reflects the internal compounding of dividends within mutual
funds as a result of their reinvestment of interest from bonds
(and other securities) upon receipt. Because of the fixed nature
of UITs, interest payments received are not reinvested, but are
held by the trust's custodian until they are distributed to
unitholders, and thus no compounding occurs within the UIT.-
[30]- The ICI has suggested, however, that because dividends
distributed to unitholders may be reinvested in a mutual fund
made available by a UIT sponsor, unitholders may obtain the
benefits of compounding. A similar argument may be made for
compounding the calculation of yield to maturity of a bond. In
both the cases, however, such a yield would not constitute a
yield from an investment, but from an investment plan. Moreover,
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-[26]- Instruction 7 to the proposed Estimated Yield Formula.
-[27]- See letter from Craig S. Tyle, Vice President and
Senior Counsel, Investment Company Institute, supra
note 12; letter from David Silver, President,
Investment Company Institute, supra note 10; letter
from Craig S. Tyle, Associate General Counsel,
Investment Company Institute, to Gene Gohlke, Acting
Director, Division of Investment Management (June 29,
1990). A copy of each letter is contained in File No.
S7-32-95.
-[28]- Item 22(b) of Form N-1A under the 1940 Act [17 CFR
274.11A].
-[29]- In an earlier submission, however, the UIT industry
asserted that the formula should replicate the yield of
a bond. See letter from James J. Wesolowski, Vice
President and General Counsel, John Nuveen & Co. Inc.,
supra note 10. This submission included a proposed
formula, the ELTR formula UITs currently use to
calculate yield, that does not compound yield to
maturity.
-[30]- To the extent that the use of the dividends and other
income by the trust custodian before their distribution
reduces the custodian's fees and thus UIT expenses,
their use already would be reflected in the proposed
Estimated Yield Formula as a higher resulting Estimated
Yield.
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the ICI's proposed formula would assume reinvestment of interest
payments immediately upon receipt by the trust and would not
reflect the delay from the time a trust receives the coupon
payments until it distributes those payments to unitholders, when
only then could they reinvest the distributions.-[31]-
In developing this proposal and reviewing the ICI proposal,
the Commission has been primarily concerned with the accuracy of
the formula. Compounding yield to maturity of a trust's
portfolio securities would result in a trust advertising an
Estimated Yield of the UIT that is higher than the yield an
investor would have obtained if the investor purchased each
security outside of the UIT. For example, if a bond trading at
par with a yield to maturity of 8 percent is deposited into a UIT
(assuming no trust expenses or sales load), the ICI-proposed
formula would produce a yield of 8.13 percent.-[32]- To avoid
such a result, the Commission is not proposing that the Estimated
Yield Formula provide for compounding.
Comment is requested whether the Estimated Yield Formula
should contain an element of compounding. Commenters supporting
compounding should address the variance that would be created
between the yields to maturity of the bonds in which UITs invest
and Estimated Yield that would be calculated under such a
formula.
3. Accrued Interest
The public offering price of units of a Fixed Income UIT
includes not only the price of the securities in a portfolio plus
a sales charge, but also a proportionate share of accrued
interest of each security in the trust.-[33]- The amount an
investor pays for the purchase of a bond, also includes accrued
interest. The calculation of a bond's yield to maturity excludes
consideration of the accrued interest because it will be returned
to bondholders upon receipt of the next interest payment. Thus,
the amount of accrued interest paid by a purchaser of a bond does
not represent part of the bondholder's investment. In contrast,
all of the accrued interest paid by a unitholder of a UIT will
not be returned in the trust's first distribution; some or all
will remain part of the net asset value of the trust and will be
used to eliminate fluctuations in periodic distributions and to
compensate the trustee who has use of the cash.
Unitholders generally receive equal distributions, on a
monthly, quarterly, semi-annual, or annual basis, based on the
interest income of the bonds in the portfolio less expenses.
Because interest on the bonds is not received at a constant rate
throughout the year, a trust may not have cash from interest
payments available to meet distributions to unitholders at the
end of a period. In such a case, the trustee will draw on the
accrued interest account, which will be replenished during a
period in which interest is received in excess of what is needed
to make distributions to unitholders. A trust's retained accrued
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-[31]- See letters from the Investment Company Institute cited
in supra note 27.
-[32]- Higher yields would produce greater differences between
the yields.
-[33]- Accrued interest on the purchase of a bond is the
dollar amount of interest, based on the coupon rate of
interest, which has accumulated on a security from the
most recent interest payment date up to but not
including the date of settlement of the purchase.
Accrued interest is paid to the seller by the purchaser
of a bond.
-------------------- BEGINNING OF PAGE #11 -------------------
interest balance generally remains positive after the trust's
first distribution.-[34]- Each unit's proportionate share of
retained accrued interest, if any, is part of the trust's net
asset value. As such, it is returned to unitholders upon
redemption, sale of a unit, or liquidation of the trust.-[35]-
The proposed Estimated Yield Formula would reflect the delay
in repayment of accrued interest by treating accrued interest as
of the date of deposit as a trust asset.-[36]- The formula would
achieve this result by requiring Fixed Income UITs, in
calculating the yield to maturity of each bond in the trust's
portfolio, to subtract from the amount of the bond's first coupon
payment and to add to the amount of the bond's last coupon
payment the amount of the bond's accrued interest as of the date
of deposit of the bond in the trust.-[37]- The Commission
requests comment on the proposed treatment of accrued interest
under the Estimated Yield Formula.
4. Principal Cash Balances
Units purchased in the secondary market often have, as a
component of their net asset value, cash balances that represent
proceeds from bonds that have matured, or have been redeemed,
called, or sold. This cash is held by the trust in the form of
principal account cash balances to be distributed to unitholders
as part of the next distribution. These amounts are returned to
unitholders shortly after their receipt by the trust and do not
represent part of the unitholders' investment. Thus, the
proposed Estimated Yield Formula would exclude these amounts from
the calculation of the trust's net asset value.-[38]-
5. Market Discount on Tax Exempt Securities
The proposed Estimated Yield Formula would require Fixed
Income UITs, in determining the yield to maturity of tax exempt
securities held by the trust, to exclude any market discount that
would be treated as capital gain under federal income tax.-[39]-
--------- FOOTNOTES ---------
--------- FOOTNOTES ---------
-[34]- See letter from David Silver, President, Investment
Company Institute, supra note 10.
-[35]- In addition, as securities in the portfolio mature, or
are called or sold, the accrued interest applicable to
such bonds is distributed to unitholders.
-[36]- In its 1989 submission, the ICI proposed to treat
accrued interest as a non-earning asset, although the
method used would have been different from that of the
proposed Estimated Yield Formula, reflecting
differences in the two formulas. See letter from David
Silver, President, Investment Company Institute, supra
note 10. The ICI's 1995 submission, upon which the
Estimated Yield Formula is based, does not appear to
provide for similar treatment.
-[37]- Instruction 2 to the proposed Estimated Yield Formula.
This Instruction would not apply to trusts in which all
accrued interest at the date of deposit is paid by the
sponsor or a person other than a unitholder.
-[38]- In its 1989 submission, the ICI suggested a similar
treatment of principal account cash balances. See
letter from David Silver, President, Investment Company
Institute, supra note 10.
-[39]- Instruction 5 to the proposed Estimated Yield Formula.
This approach is similar to the treatment of market
(continued...)
-------------------- BEGINNING OF PAGE #12 -------------------
In its 1989 submission, the ICI proposed an alternative that
would permit Fixed Income UITs to quote an Estimated Yield that
reflects the accretion of market discount and to disclose the
portion of that yield that could be subject to federal income
tax.-[40]- The Commission is not proposing to include the ICI's
proposed alternative in the determination of Estimated Yield out
of concern that the ICI's approach would lead to a confusing
multiplicity of Estimated Yield quotations, particularly for
prospective investors in trusts quoting more than one yield
because of different distribution options.-[41]- The Commission
requests comment on the Estimated Yield Formula's proposed
treatment of market discount on tax exempt securities.
6. Preferred Stock, Asset-Backed Securities, and
Adjustable-Rate Securities
As discussed above, the proposed Estimated Yield Formula is
designed to measure the anticipated yield from a portfolio of
fixed income securities that yield income at a predictable rate.
Most UITs that invest their assets in corporate, municipal, or
U.S. government bonds invest almost exclusively in these
securities. These securities are issued with stated maturities
and fixed interest rates, and thus, the yield of trusts that
invest in these securities can be estimated with reasonable
certainty. A Fixed Income UIT, however, may have some of its
assets invested in preferred stock, asset-backed
securities,-[42]- or adjustable-rate securities,-[43]- the
issuers of which have no legal obligation to pay a fixed amount
of interest or dividends. Because the income from these
securities is not as predictable as the income from traditional
bonds, the Commission is proposing to require trusts holding
these instruments to disclose in their prospectuses,
advertisements, and sales literature that some of their assets
are invested in these types of securities and that, as a result,
their yields likely will fluctuate.-[44]-
Approximately three percent of the assets of UITs are
invested in trusts substantially all the assets of which consist
--------- FOOTNOTES ---------
--------- FOOTNOTES ---------
-[39]-(...continued)
discount on tax exempt securities by the mutual fund
yield formula. See Instruction 1(e) to Item 22(v)(ii)
to Form N-1A under the 1940 Act [17 CFR 274.11A].
-[40]- See letter from David Silver, President, Investment
Company Institute, supra note 10.
-[41]- See discussion supra section II.A.3.
-[42]- The cash flows of asset-backed securities, including
mortgaged-backed securities, are based on an underlying
pool of mortgages or other income-producing assets.
See F. Fabozzi, The Handbook of Fixed Income
Securities, 16-19 (4th ed. 1995).
-[43]- Adjustable-rate securities, including floating-rate and
variable-rate securities, have interest rates that
adjust periodically over their stated life. Id. at 7.
-[44]- Instruction 15 to the proposed Estimated Yield Formula.
The proposed Estimated Yield Formula also would provide
specific instructions for calculating yield to maturity
for these securities and for determining their expected
life for purposes of amortizing sales load.
Instructions 12-14 to the proposed Estimated Yield
Formula.
-------------------- BEGINNING OF PAGE #13 -------------------
of preferred stock, asset-backed securities, or adjustable-rate
securities.-[45]- The Commission is proposing that these UITs
use the proposed formula to calculate yield, but would require
them to characterize the yield as "Current Yield" to emphasize
that it does not represent a rate an investor can expect to
receive in the future. In addition, these trusts would be
required to provide a statement that, because the continued
payment of interest (and return of principal for asset-backed
securities) for these types of securities cannot be predicted,
the trust's yield will vary and, as a result, actual investor
experience will be different from the quoted yield.-[46]-
The Commission requests comment on the proposed treatment of
preferred stock, asset-backed securities, and adjustable-rate
securities. Specifically, the Commission requests comment
whether the proposed disclosure adequately would inform investors
of the uncertainty of yield estimates for trusts that invest in
these types of securities. The Commission also requests comment
whether the proposed formula should define those trusts that
invest "substantially" all their assets in preferred stock,
asset-backed securities, and adjustable-rate securities and, if
so, what that definition should be.
7. Units of Other Trusts
Fixed Income UITs sometimes hold units of other trusts in
their portfolios. Although the Estimated Yield of these trusts
could be used as their yield to maturity in the Estimated Yield
Formula, in its 1989 submission the ICI urged that the Commission
not adopt such a requirement because it would be complicated and
burdensome. According to the ICI, in many cases these trusts are
no longer offered in the secondary market and thus the trust
sponsor no longer calculates their yield.-[47]- Instead, the ICI
suggested that the Commission permit UITs to calculate the yield
to maturity of these units based on the average dollar price,
average coupon rate, and average yield to maturity of the
securities held by the trust.-[48]- The Commission is proposing
the approach recommended by the ICI, but only for units of trusts
that are not currently calculating Estimated Yield.-[49]-
8. Tax Equivalent Yield
The proposed Estimated Yield Formula would provide Fixed
Income UITs a method of calculating a tax equivalent yield.-
[50]- A tax equivalent yield would demonstrate the taxable yield
necessary to produce an after-tax yield equivalent to that of a
trust which invests in tax exempt securities. Under the
proposal, tax equivalent yield would be calculated by dividing
that portion of the yield of the trust that is tax exempt by one
minus a stated income tax rate and adding to the product that
portion, if any, of the yield of the trust that is not tax
--------- FOOTNOTES ---------
--------- FOOTNOTES ---------
-[45]- Source: Investment Company Institute.
-[46]- Instruction 16 to the proposed Estimated Yield Formula.
-[47]- See letter from David Silver, President, Investment
Company Institute, supra note 10.
-[48]- Id.
-[49]- Instruction 6 to the proposed Estimated Yield Formula.
-[50]- UITs would not be required to quote a tax equivalent
yield.
-------------------- BEGINNING OF PAGE #14 -------------------
exempt.-[51]- This would provide a uniform method for
calculating tax equivalent yield.-[52]- The Commission requests
comment on the proposed method of calculating tax equivalent
yield for Fixed Income UITs. In addition, the Commission
requests comment whether bonds that distribute interest income
that may be subject to the alternative minimum tax under Federal
tax law should be considered taxable bonds for purposes of the
proposed Estimated Yield Formula. The Commission requests
comment whether, if these bonds are not considered taxable bonds,
additional disclosure should be required by trusts holding
themselves out as distributing tax exempt income but which invest
in bonds that distribute interest income that, when distributed
to unitholders, may be subject to the alternative minimum tax.
B. Scope of Application of the Proposed Estimated Yield
Formula
1. Prospectuses
The Commission is proposing to amend Form S-6 to require
Fixed Income UITs to include in the summary financial data,
typically provided in the front part of each UIT prospectus, a
quotation of its Estimated Yield. The proposed Estimated Yield
Formula would define "Fixed Income UITs" as trusts investing
substantially all their assets in bonds and other debt
instruments, preferred stock, or a combination of these types of
securities. Comment is requested on the proposed definition of
Fixed Income UITs. Comment is specifically requested whether the
Estimated Yield Formula should define the term "substantially,"
and, if so, what that definition should be.
The amendments would not preclude a trust from including a
quotation of the UIT's ECR provided that, under the
circumstances, the ECR is not misleading and that the differences
between ECR and Estimated Yield are clearly described in the
prospectus. As proposed, the amendments would require a trust
using ECR or some other method of estimating return (e.g., ELTR)
to include a brief description of the differences between
Estimated Yield and the other method and a statement that the
trust's Estimated Yield is calculated following a Commission-
prescribed formula designed to estimate the yield an investor
holding a unit for the expected life of the trust may
receive.-[53]-
2. Advertisements and Sales Literature
The Commission is proposing to amend rule 482 under the 1933
Act and rule 34b-1 under the 1940 Act to require Fixed Income
UITs to include a quotation of Estimated Yield, as prescribed by
Form S-6, in their advertisements and sales literature that
contain a quotation of yield, or other similar quotation
purporting to demonstrate the income earned or distributions made
--------- FOOTNOTES ---------
--------- FOOTNOTES ---------
-[51]- Instruction 10 to the proposed Estimated Yield Formula.
The proposed method of calculating tax equivalent yield
is similar to the mutual fund yield formula's method of
calculating tax equivalent yield. See Item 22(b) of
Form N-1A under the 1940 Act [17 CFR 274.11A].
-[52]- A UIT that includes a quotation of tax equivalent yield
in its prospectuses, advertisements and sales
literature would be require to provide a quotation of
its Estimated Yield at least as prominently as its tax
equivalent yield.
-[53]- Paragraph (f)(3) of the proposed Estimated Yield
Formula.
-------------------- BEGINNING OF PAGE #15 -------------------
or to be made by a Fixed Income UIT.-[54]- Advertisements and
sales literature of Fixed Income UITs that contain a quotation of
yield also would be required to contain a legend disclosing that
the Estimated Yield quoted is an estimate of the rate of return
an investor holding a unit for the expected life of the trust may
receive, actual return to the investor may vary from the
estimate, and that an investor's units, when redeemed, may be
worth more or less than their original cost.-[55]- As discussed
above, Fixed Income UITs that invest substantially all or a
portion of their assets in preferred stock, asset-backed
securities, or in adjustable-rate securities would be required to
provide additional disclosure in their advertisements and sales
literature.-[56]-
Under the proposed amendments, UITs may continue to
advertise performance information other than Estimated Yield or
Current Yield, including ECR, if a quotation of Estimated Yield
is included at least as prominently as the other performance
information. The Commission requests comment whether the
performance information permitted in all Fixed Income UIT
advertisements should be limited to the yields calculated
pursuant to the proposed Estimated Yield Formula.
3. Secondary Market Sales
As discussed above, sponsors generally maintain a secondary
market in units of the UITs they sponsored. Sponsors typically
repurchase units at the redemption price or net asset value of
the trust based on the bid side evaluation of the bonds and
resell the units to new investors based on the offer side
evaluation of the bonds. The proposed Estimated Yield Formula
would require that UITs calculate Estimated Yield based on the
maximum offering price per unit, which, in the case of a trust
the units of which are trading in a secondary market, would be
the price at which the sponsor is willing to resell the
units.-[57]-
In some cases, an investor who purchases a UIT in the
secondary market will be charged a sales load. The proposed
Estimated Yield Formula would require UITs to include in the
public offering price of the units the maximum sales load that
may be charged to an investor in the secondary market.-[58]-
C. Alternative Formula
The Commission requests comment whether, in lieu of the
Estimated Yield Formula, the Commission should require a trust to
calculate and disclose a yield measured by the trust's internal
rate of return ("IRR"). IRR is the discount rate that would make
the amount paid by the investor for the investment (including
sales load) equivalent in value to the payments expected from the
trust.-[59]- Unlike the Estimated Yield Formula, IRR would take
--------- FOOTNOTES ---------
--------- FOOTNOTES ---------
-[54]- Proposed rule 482(f) under the 1933 Act [17 CFR
230.482(f)]; proposed rule 34b-1(c)(2) under the 1940
Act [17 CFR 270.34b-1(c)(2)].
-[55]- Proposed rule 482(a)(8) under the 1933 Act [17 CFR
230.482(a)(8)]; proposed rule 34b-1(c)(1) under the
1940 Act [17 CFR 270.34b-1(c)(1)].
-[56]- Instructions 15-16 to the proposed Estimated Yield
Formula.
-[57]- Instruction 11 to the proposed Estimated Yield Formula.
-[58]- Id.
-[59]- See F. Fabozzi, supra note 42 at 71-72.
-------------------- BEGINNING OF PAGE #16 -------------------
into consideration different cash flows unitholders selecting
different distribution options will receive. The Commission's
staff has discussed with the ICI the desirability and feasibility
of a UIT yield formula based on a trust's IRR.-[60]- In
correspondence with the staff in 1990, the ICI asserted that the
amount of computer time required to generate IRR for each
distribution option for each trust would be so great as to
significantly disrupt UIT sponsors' computer operations and
increase UIT expenses.-[61]- In light of the significant
advancements in computer technology over the past several years,
the Commission requests comment whether calculation of IRR would
be feasible, and, if so, whether IRR could provide an accurate
but simpler method for calculating UIT yield than the Estimated
Yield Formula.
III. GENERAL REQUEST FOR COMMENTS
Any interested persons wishing to submit written comments on
the rule and form changes that are the subject of this release,
to suggest additional changes, or to submit comments on other
matters that might have an effect on the proposals contained in
this release, are requested to do so.
IV. COST/BENEFIT ANALYSIS
The rule and form changes proposed today are intended to
improve information regarding the estimated yield of UITs
provided to investors by requiring that yield be uniformly
calculated in a manner reasonably likely to provide a "best
estimate" of the return in an investment in a UIT. The
Commission believes that any resulting increase in the expenses
of UITs and their sponsors will be small, particularly in
relation to the benefit of preventing the advertisement of
misleading or inaccurate information.
The proposed formula is not expected to be significantly
more costly to calculate than current formulas used in connection
with UIT offerings. The proposed amendments therefore should
result in little increase in the cost of calculating or
advertising performance information. Converting to the use of a
new formula (e.g., reprogramming computers) would involve certain
costs, but the costs of any conversion should be outweighed by
the benefits of more accurate UIT yield figures.
--------- FOOTNOTES ---------
--------- FOOTNOTES ---------
-[60]- Letter from Kathryn B. McGrath, Director, Division of
Investment Management, to David Silver, President,
Investment Company Institute (Apr. 17, 1990). A copy
of this letter is contained in File No. S7-32-95.
-[61]- Letter from Craig S. Tyle, Associate General Counsel,
Investment Company Institute, supra note 27.
-------------------- BEGINNING OF PAGE #17 -------------------
V. SUMMARY OF INITIAL REGULATORY FLEXIBILITY ACT ANALYSIS
The Commission has prepared an Initial Regulatory
Flexibility Analysis in accordance with 5 U.S.C. 603 regarding
the proposed amendments. The analysis reiterates the reasons and
objectives for the proposed amendments discussed above in this
Release. The analysis also describes the legal basis for the
proposal and discusses its effect on small entities as defined by
the 1940 Act. In addition, the analysis considers several
alternatives to the proposed amendments such as requiring a trust
to calculate its IRR. The analysis notes, however, that these
alternatives would not be less costly than the proposed Estimated
Yield Formula. The analysis also notes that the proposed
Estimated Yield Formula is based on a proposal submitted by the
UIT industry. Other aggregate cost-benefit information reflected
in the "Cost/Benefit Analysis" section of this release also is
reflected in the analysis. A copy of the analysis may be
obtained by contacting Anthony R. Bosch, Office of Disclosure and
Investment Adviser Regulation, Division of Investment Management,
Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
VI. PAPERWORK REDUCTION ACT
Certain provisions of the proposed rule and form amendments
contain "collection of information" requirements within the
meaning of the Paperwork Reduction Act of 1995 [44 U.S.C. 3501 et
seq.], and the Commission has submitted the rule and form
amendments to the Office of Management and Budget for review in
accordance with 44 U.S.C. 3507(d). The title for the collection
of information is "Amendments to Regulation C, Rule 34b-1, and
Form S-6." The Supporting Statement to the Paperwork Reduction
Act submission notes that the proposed amendments would amend
Form S-6, rule 482, and rule 34b-1 to require certain UITs to use
a uniform formula to calculate yields quoted in their
prospectuses, advertisements, and sales literature and that the
proposed amendments are designed to enhance the ability of
prospective investors to make informed investment decisions.
Proposed amendments to Form S-6, Regulation C, and rule 34b-
1 would have a negligible effect on the annual reporting and cost
burden of UITs. Because most UITs currently calculate yield
quoted in their prospectuses, advertisements, and sales
literature, the proposed amendments should not significantly
increase the reporting and cost burdens in connection with UIT
offerings. Form S-6 is used for registration of securities under
the 1933 Act by UITs registered under the 1940 Act. UITs file
approximately 3263 registration statements on Form S-6 annually.
Form S-6 requires an estimated 35 reporting burden hours
resulting from the required collection of information. Rule 34b-
1 under the 1940 Act governs sales material that accompany or
follow the delivery of a statutory prospectus. Approximately 287
respondents (including UITs) each file approximately five
responses annually pursuant to rule 34b-1. The recordkeeping
burden from rule 34b-1 requires approximately 2.4 hours per
response resulting from the required collection of information.
Regulation C provides standard instructions to guide registrants
filing registration statements under the 1933 Act. Regulation C
is assigned one burden hour for administrative convenience
because the rule simply prescribes the disclosure that must
appear in other filings under the 1933 Act.
The Commission requests specific comment concerning: whether
the proposed collection of information is necessary for the
proper performance of the function of the Commission, including
whether the information shall have practical utility; on the
accuracy of the Commission's estimate of the burden of the
proposed collection of information; on the quality, utility, and
clarity of the information to be collected; and whether the
-------------------- BEGINNING OF PAGE #18 -------------------
burden of collection of information on those who are to respond,
including through the use of automated collection techniques or
other forms of information technology may be minimized.
Persons desiring to submit comments on the collection of
information requirements should direct them to the Office of
Management and Budget, Attention: Desk Officer for the Securities
and Exchange Commission, Office of Information and Regulatory
Affairs, Washington, D.C. 20503, and should also send a copy of
their comments to Jonathan G. Katz, Secretary, Securities and
Exchange Commission, 450 5th Street, Washington, D.C. 20549 with
reference to File No. S7-32-95. The Office of Management and
Budget is required to make a decision concerning the collections
of information between 30 and 60 days after publication, so a
comment to the Office of Management and Budget is best assured of
having its full affect if the Office of Management and Budget
receives it within 30 days of publication.
VII. TEXT OF PROPOSED RULE AND FORM AMENDMENTS
List of Subjects in 17 CFR Parts 230 and 239
Reporting and recordkeeping requirements, Securities
List of Subjects in 17 CFR Part 270
Investment companies, Reporting and recordkeeping requirements,
Securities
For the reasons set out in the preamble, Title 17, Chapter
II of the Code of Federal Regulations is proposed to be amended
as follows:
PART 230 - GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
1. The authority citation for Part 230 continues to read
in part as follows:
Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss,
78c, 78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 78t, 80a-8, 80a-29,
80a-30, and 80a-37, unless otherwise noted.
* * * * *
2. By amending Section 230.482 by removing the comma at
the
end of paragraphs (a)(1), (a)(2), (a)(3), and (a)(4) and in its
place adding a semicolon; by removing the ", and" at the end of
paragraph (a)(5) and in its place adding a semicolon; by removing
the period at the end of paragraph (a)(7) and in its place adding
"; and"; by adding paragraph (a)(8) before the note; by
redesignating paragraph (f) as paragraph (g); and by adding
paragraph (f) to read as follows:
Section 230.482 Advertising by an investment company as
satisfying requirements of section 10.
(a) * * *
(8) In the case of an advertisement of a Fixed Income UIT,
defined in Instruction 1 to Form S-6 under the Act,
(Section239.16 of this chapter), containing a quotation of
Estimated Yield, defined in Form S-6, or other similar quotation
purporting to demonstrate the income earned or distributions made
or to be made by the trust, shall also include a legend
disclosing that the Estimated Yield quoted is an estimate of the
rate of return an investor holding a unit for the expected life
of the trust may receive, actual return to the investor may vary
from the estimate, and that an investor's units, when redeemed,
may be worth more or less than their original cost.
* * * * *
(f) In the case of a Fixed Income UIT, any advertisement
containing a quotation of yield, or other similar quotation
purporting to demonstrate the income earned or distributions made
or to be made by the trust, shall also include a quotation of
Estimated Yield that:
(1) Is based on the method of computation prescribed in Form
S-6; and
(2) Identifies the date in which an investment in the trust
would result in the advertised Estimated Yield.
-------------------- BEGINNING OF PAGE #19 -------------------
* * * * *
PART 239 - FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
3. The authority citation for Part 239 continues to read
in part as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77sss, 78c,
78l, 78m, 78n, 78o(d), 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l,
79m, 79n, 79q, 79t, 80a-8, 80a-29, 80a-30 and 80a-37, unless
otherwise noted.
* * * * *
4. By amending Form S-6 (referenced in Section 239.16) by
adding paragraph (f) to Instruction 1 of the Instructions As To
The Prospectus to read as follows:
Note: The text of Form S-6 does not and the amendments will not
appear in the Code of Federal Regulations.
Form S-6
* * * * *
INSTRUCTIONS AS TO THE PROSPECTUS
Instruction 1. Information to be Contained in Prospectus.
* * * * *
(f) Information Concerning Registrant's Performance.
Estimated Yield. In the case of a trust that invests
substantially all of its assets in bonds and other debt
instruments, preferred stock, or a combination of these types of
securities ("Fixed Income UIT"):
(1) Furnish the trust's estimated yield to maturity
("Estimated Yield") calculated as of a day reasonably close to
the effective date of the registration statement or the
commencement of the offering:
Estimated Yield = [(a-b) * c] - x
Where,
a = sum of (market value of each security * yield to
maturity of each security * time to maturity of each
security)/sum of (market value of each security * time
to maturity of each security)
b = total annual expenses of the trust/net asset value of
the trust
c = 1 - sales load
x = sales load * r
(1+r)n-1
r = (a-b) * c
n = number of annual periods until amortization date.
(2) Provide a statement that the trust's Estimated Yield is
calculated following a SEC-prescribed formula designed to
estimate the yield an investor holding a unit for the expected
life of the trust may receive, but that actual investor
experience may be different.
(3) If the trust provides an estimated rate of return
calculated using a different method, provide a brief description
of the relevant differences between the other rate of return and
the trust's Estimated Yield.
Instructions:
-------------------- BEGINNING OF PAGE #20 -------------------
Yield to Maturity
1. In determining the yield to maturity and time to maturity of
each security in "a", consider the maturity of a security with a
call provision(s) as the date with the lowest resulting yield to
call, yield to par option, or yield to maturity pursuant to rule
G-15 of the Municipal Securities Rulemaking Board.
2. In determining the yield to maturity of each security in
"a", subtract from the amount of each security's first coupon
payment and add to the amount of each security's last coupon
payment the amount of accrued interest of that security as of the
date of deposit. (This accrued interest also should be included
in the price of each bond.) In calculating Estimated Yield
subsequent to the initial offering of the trust, use the same
amount of accrued interest. In the case of a trust in which all
accrued interest at the date of deposit is paid by the sponsor or
a person other than a unitholder, this Instruction does not
apply.
3. In determining the market value of each security and the net
asset value of the trust in "a" and "b" respectively, include the
amount of accrued interest or any advance of accrued interest
that is paid by unit holders upon purchase of the units.
4. In determining the net asset value of the trust in "b", do
not include the amount of repayments of principal of securities
held in a trust's portfolio that are to be distributed to
unitholders.
5. In the case of a tax exempt obligation issued without
original issue discount and having a current market discount, use
the coupon rate of interest in lieu of the yield to maturity.
Where, in the case of a tax exempt obligation with original issue
discount, and the discount based on the current market value
exceeds the then-remaining portion of original issue discount
(market discount), the yield to maturity is the imputed rate
based on the original issue discount calculation. Where, in the
case of a tax exempt obligation with original issue discount, and
the discount based on the current market value is less than the
then-remaining portion of original issue discount (market
premium), the yield to maturity should be based on the market
value.
6. In the case of a trust that invests in units of other trusts
for which an Estimated Yield is not available from the sponsor,
determine the yield to maturity of the other trust using the
other trust's average dollar price, average coupon rate, and
average yield to maturity. Determine the other trust's average
dollar price by dividing the sum of the net asset values of the
bonds in the other trust by the sum of the par values of the
bonds. Determine the other trust's average coupon rate and
average yield to maturity by weighting the coupon rate and yield
to maturity of each bond in the other trust by its market value.
Sales Load
7. Sales load in "c" and "x" is the maximum sales load stated
as a percentage of the offering price of units. In the case of a
deferred sales load, the maximum sales load is the aggregate of
all installment loads, stated as a percentage of the offering
price.
-------------------- BEGINNING OF PAGE #21 -------------------
8. In determining the amortization date of a trust in "n",
calculate an average, weighted by market value, of the expected
lives of the bonds in the trust. To calculate the expected life
of each bond in the trust:
(a) For bonds priced at par or at a discount and for bonds
priced at a premium where the yield to maturity is less than or
equal to yield to call (as determined by Instruction 1) plus .4%
(40 basis points), use the maturity date of the bond(s); and
(b) For bonds priced at a premium where yield to maturity
is greater than yield to call (as determined by Instruction 1)
plus .4% (40 basis points), use the call date of the bond(s).
Expenses
9. A trust that has different Estimated Yields for different
classes of unit holders, (e.g., because of different distribution
payment options that result in different expense ratios) may
include a quotation of more than one Estimated Yield. If such a
trust quotes a single yield, in determining the total annual
expenses of the trust in "b", assume the highest expense ratio is
applicable to all of the assets of the trust.
Tax Equivalent Yield
10. If a trust quotes a tax equivalent yield, calculate tax
equivalent yield by dividing that portion of the yield of the
trust that is tax exempt by one minus a stated income tax rate
and adding to the product that portion, if any, of the yield of
the trust that is not tax exempt. Any quotation of tax
equivalent yield in the trust's prospectus, advertisements, or
sales literature, should be accompanied by a quotation of
Estimated Yield that is given equal prominence.
Secondary Market Sales
11. In calculating Estimated Yield subsequent to the initial
offering of the trust, use the maximum public offering price at
which the trust's sponsor is willing to sell trust units to an
investor and the maximum sales load that may be charged to an
investor for trust units.
Preferred Stock, Asset-Backed Securities, and Adjustable-Rate
Securities
12. In the case of preferred stock:
(a) In lieu of yield to maturity in determining "a", use
the preferred stock's interest rate calculated by dividing the
security's dividend by its market value and by annualizing on a
straight-line method, (e.g., multiply a quarterly payment rate by
4);
(b) In determining the amortization date in "n", in the
case of preferred stock that can be converted to common stock or
is subject to a redemption feature, use as the security's
expected life: the lesser of the time period to its conversion
date, its redemption date or the trust's termination date; and
(c) In determining the amortization date in "n", in the
case of all other preferred stock, use the trust's termination
date as the security's expected life.
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13. In determining each asset-backed security's yield to
maturity in "a" and in determining each asset-backed security's
amortization period in "n", in lieu of its maturity date, use the
same "expected life" of the security used for calculating the
price of the security as part of the trust's net asset value.
14. (a) For adjustable-rate securities not subject to a demand
feature, use the next reset date as the maturity date for
calculating yield to maturity in "a"; and
(b) For adjustable-rate securities subject to a demand
feature, use the time remaining until the next demand date or the
next reset date, whichever is less, as the maturity date for
calculating yield to maturity in "a".
15. In the case of a trust that invests some of its assets in
preferred stock, asset-backed securities, or adjustable-rate
securities, in addition to the disclosure required by paragraph
(f)(2) of Form S-6, disclose that some of the trust's assets (__
%) is invested in (preferred stock, asset-backed securities, or
adjustable-rate securities), and, because the continued payment
of interest or other income (and return of principal for asset-
backed securities) for these types of securities cannot be
predicted, this portion of the trust's yield will vary and, as a
result, actual investor experience will be different.
16. In the case of a trust that invests substantially all of its
assets in preferred stock, asset-backed securities, or
adjustable-rate securities refer to its yield, calculated
pursuant to the Estimated Yield Formula, as "Current Yield"; and,
in addition to the disclosure required by paragraph (f)(2) of
Form S-6, disclose that, because the continued payment of
interest or other income (and return of principal for asset-
backed securities) for these types of securities cannot be
predicted, the trust's yield will vary and, as a result, actual
investor experience will be different. Provide a cross-reference
to the part of the prospectus in which the portfolio securities
are described.
17. In the case of a trust that invests substantially all or a
portion of its assets in preferred stock, asset-backed
securities, or adjustable-rate securities and provides a yield in
its advertisements pursuant to Rule 482 under the Act [17 CFR
230.482], or in its sales literature in compliance with Rule 34b-
1 under the 1940 Act [17 CFR 270.34b-1], in lieu of the
disclosure required by Rule 482(a)(8) under the Act [17 CFR
230.482(a)(8)] or Rule 34b-1(c)(1) under the 1940 Act [17 CFR
270.34b-1(c)(1)] provide the disclosure required by Instructions
15 and 16 (excluding the cross-reference) as appropriate.
Securities Denominated in Foreign Currencies
18. In the case of a security denominated in a foreign currency,
convert its market value into U.S. dollars at the exchange rate
in effect at the time of calculation.
Additional
19. Determine Estimated Yield to the nearest hundredth of one
percent. Use calculations using market price, accrued interest,
annual periods, expenses, net asset value, or number of years to
the nearest one thousandth. Base calculations using yield to
maturity, coupon rate, or sales load to the nearest thousandth of
one percent.
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20. In the case of a post-effective amendment to the trust's
registration statement, calculate the trust's Estimated Yield as
of a date reasonably close to the date of filing of the post-
effective amendment.
* * * * *
PART 270 - GENERAL RULES AND REGULATIONS, INVESTMENT COMPANY ACT
OF 1940
5. The authority citation for Part 270 continues to read,
in part, as follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-37, 80a-39 unless
otherwise noted;
* * * * *
6. By revising Section 270.34b-1 to read as follows:
Section 270.34b-1 Sales literature deemed to be misleading.
Any advertisement, pamphlet, circular, form letter, or other
sales literature addressed to or intended for distribution to
prospective investors that is required to be filed with the
Commission by section 24(b) of the Act [15 U.S.C. 80a-24(b)]
("sales literature") shall have omitted to state a fact necessary
in order to make the statements made therein not materially
misleading unless the sales literature includes the information
specified in paragraphs (a), (b) and (c) of this section.
(a) Sales literature for a money market fund shall contain
the information required by paragraph (a)(7) of Section 230.482
of this chapter.
(b) Except as provided in paragraph (d) of this section,
any sales literature containing performance data of an open-end
management investment company or a separate account registered
under the Act as a unit investment trust offering variable
annuity contracts shall also include:
(1) The disclosure required by paragraph (a)(6) of
Section 230.482 of this chapter; and
(2) The following additional performance data, which shall
meet the currentness requirements of paragraph (g) of
Section 230.482 of this chapter:
(i) Except in the case of a money market fund, the total
return information required by paragraph (e)(3) of Section
230.482 of this chapter;
(ii) In the case of sales literature containing a quotation
of yield or other similar quotation purporting to demonstrate the
income earned or distributions made by the company, a quotation
of current yield specified by paragraph (e)(1) of Section 230.482
of this chapter, or, in the case of a money market fund,
paragraph (d)(1) of Section 230.482 of this chapter; and
(iii) In the case of sales literature containing a
quotation of tax equivalent yield or other similar quotation
purporting to demonstrate the tax equivalent of income earned or
distributions made by the company, a quotation of tax equivalent
yield specified by paragraph (e)(2) and current yield specified
by paragraph (e)(1) of Section 230.482 of this chapter, or, in
the case of a money market fund, paragraph (d)(1) of Section
230.482 of this chapter.
(c) Any sales literature containing a quotation of yield,
or other similar quotation purporting to demonstrate the income
earned or distributions made or to be made by a Fixed Income UIT
defined in Instruction 1 to Form S-6 under the Securities Act of
1933, (Section 239.16 of this chapter), shall also include:
(1) The disclosure required by paragraph (a)(8) of
Section 230.482 of this chapter; and
-------------------- BEGINNING OF PAGE #24 -------------------
(2) A quotation of Estimated Yield specified by paragraph
(f) of Section230.482 of this chapter which shall meet the
currentness requirements of paragraph (g) of Section 230.482 of
this chapter.
-------------------- BEGINNING OF PAGE #25 -------------------
(d) The requirements specified in paragraph (b) of this
section shall not apply to any quarterly, semi-annual or annual
report to shareholders under section 30 of the Act [15 U.S.C.
80a-29], containing performance data for a period commencing no
earlier than the first day of the period covered by the report;
nor shall the requirements of paragraphs (e)(3)(ii) and (g) of
Section 230.482(e)(3)(ii) and (g) apply to any such periodic
report containing any other performance data.
NOTE to Section 270.34b-1: Sales literature of an open-end
management company or a separate account (except that of a
money market fund) containing a quotation of yield or tax
equivalent yield must also contain the total return
information. In the case of sales literature, the
currentness provisions apply from the date of distribution
and not the date of submission for publication.
By the Commission.
Jonathan G. Katz
Secretary
Date: November 22, 1995