Calculation of Yield by Certain Unit Investment Trusts

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 NW., 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 NW., 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 NW., 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 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.

\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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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 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.

\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.

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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

[[Page 61455]]

anticipated income rate to the investment decisions of UIT investors

makes it particularly important that the rate is uniformly and

accurately calculated.

\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).

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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

that may be reasonably anticipated over the life of the trust.7

\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.

\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.

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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 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.

\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 of

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 of 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 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.

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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

\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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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 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.

\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.

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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

[[Page 61456]]

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.

\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%.

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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 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

\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)].

\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) para.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%).

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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.

\21\See letter from Craig S. Tyle, Vice President and Senior

Counsel, Investment Company Institute, supra note 12.

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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 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.

\22\Id.

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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.

\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.

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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 deposit, for calculating Estimated Yield of

trusts whose unitholders pay a deferred or installment load.26

\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.

\26\Instruction 7 to the proposed Estimated Yield Formula.

[[Page 61457]]

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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

\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.

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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, 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

\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.

\31\See letters from the Investment Company Institute cited in

supra note 27.

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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.

\32\Higher yields would produce greater differences between the

yields.

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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.

\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.

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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 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

\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.

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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.

\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.

[[Page 61458]]

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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

\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.

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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 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.

\39\Instruction 5 to the proposed Estimated Yield Formula. This

approach is similar to the treatment of market 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.

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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

\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.

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Approximately three percent of the assets of UITs are invested in

trusts substantially all the assets of which consist 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

\45\Source: Investment Company Institute.

\46\Instruction 16 to the proposed Estimated Yield Formula.

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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

\47\See letter from David Silver, President, Investment Company

Institute, supra note 10.

\48\Id.

\49\Instruction 6 to the proposed Estimated Yield Formula.

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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 exempt.51 This would provide a

[[Page 61459]]

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.

\50\UITs would not be required to quote a tax equivalent yield.

\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

required to provide a quotation of its Estimated Yield at least as

prominently as its tax equivalent yield.

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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

\53\Paragraph (f)(3) of the proposed Estimated Yield Formula.

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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 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

\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.

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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

\57\Instruction 11 to the proposed Estimated Yield Formula.

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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

\58\Id.

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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 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.

\59\See F. Fabozzi, supra note 42 at 71-72.

\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.

[[Page 61460]]

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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.

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 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

17 CFR Parts 230 and 239

Reporting and recordkeeping requirements, Securities.

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 Sec. 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

[[Page 61461]]

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:

Sec. 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, (Sec. 239.16 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.

* * * * *

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 Sec. 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

[GRAPHIC][TIFF OMITTED]TP29NO95.017

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

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.

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.

[[Page 61462]]

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.

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.

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 Sec. 270.34b-1 to read as follows:

Sec. 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 Sec. 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 Sec. 230.482 of

this chapter; and

(2) The following additional performance data, which shall meet the

currentness requirements of paragraph (g) of Sec. 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 Sec. 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 Sec. 230.482 of this chapter,

or, in the case of a money market fund, paragraph (d)(1) of

Sec. 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 Sec. 230.482

of this chapter, or, in the case of a money market fund, paragraph

(d)(1) of Sec. 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,

(Sec. 239.16 of this chapter), shall also include:

(1) The disclosure required by paragraph (a)(8) of Sec. 230.482 of

this chapter; and

(2) A quotation of Estimated Yield specified by paragraph (f) of

Sec. 230.482 of this chapter which shall meet the currentness

requirements of paragraph (g) of Sec. 230.482 of this chapter.

[[Page 61463]]

(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 Sec. 230.482 (e)(3)(ii) and (g) apply

to any such periodic report containing any other performance data.

Note to Sec. 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.

Dated: November 22, 1995.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-29109 Filed 11-28-95; 8:45 am]

BILLING CODE 8010-01-P