[Federal Register: November 28, 2003 (Volume 68, Number 229)]
[Notices]
[Page 66890-66892]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28no03-124]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 26261; 812-12877]
First Trust Portfolios, L.P., et al.; Notice of Application
November 21, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order under section 12(d)(1)(J)
of the Investment Company Act of 1940 (the ``Act'') for an exemption
from sections 12(d)(1)(A), (B) and (C) of the Act and under sections
6(c) and 17(b) of the Act for an exemption from section 17(a) of the
Act.
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Summary of the Application: FT Series (the ``Trust'') and any
registered unit investment trusts (``UITs'') organized in the future
and sponsored by First Trust Portfolios, L.P. (``Sponsor''), and their
respective series (together with the Trust, the ``Trusts'', and each
series of the Trusts, a ``Trust Series''), request an order to permit
the Trusts to acquire shares of registered management investment
companies and UITs both within and outside the same group of investment
companies.
Applicants: First Trust Portfolios, L.P. and FT Series.
Filing Dates: The application was filed on August 28, 2002 and amended
on November 10, 2003.
Hearing or Notification of Hearing: An order granting the requested
relief will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by writing to the Commission's
Secretary and serving applicants with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission by
5:30 p.m. on December 16, 2003, and should be accompanied by proof of
service on applicants, in the form of an affidvavit or, for lawyers, a
certificate of service. Hearing requests should state the nature of the
writer's interest, the reason for the request, and the issues
contested. Persons who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington,
DC, 20549-0609. Applicants, 1001 Warrenville Road, Lisle, IL 60532.
FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Sr., Senior Counsel,
at (202) 942-0714, or Annette Capretta, Branch Chief, at (202) 942-0564
(Division of Investment Management, Office of Investment Company
Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
Commission's Public Reference Branch, 450 Fifth Street, NW.,
Washington, DC, 20549-0102 (tel. 202-942-8090).
Applicants' Representations
1. The Trust is a UIT registered under the Act. Each Trust Series
will be a series of a Trust, each a UIT which is or will be registered
under the Act.\1\ The Sponsor, an Illinois limited partnership, is
registered under the Securities Exchange Act of 1934 as a broker-
dealer.
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\1\ All Trusts that currently intend to rely on the requested
order are named as applicants. Any other Trust that relies on the
order in the future will comply with the terms and conditions of the
application.
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2. Applicants request relief to permit a Trust Series to invest in
(a) registered investment companies that are part of the same ``group
of investment companies'' (as that term is defined in section
12(d))(1)(G) of the Act) as the Trust (``Affiliated Funds''), and (b)
registered investment companies that are not part of the same group of
investment companies as the Trust (``Unaffiliated Funds,'' together
with Affiliated Funds, the ``Funds''). The Unaffiliated Funds may
include UITs (``Unaffiliated Underlying Trusts'') and open-end or
closed-end management investment companies (``Unaffiliated Underlying
Funds''). Certain of the Unaffiliated Underlying Trusts or Unaffiliated
Underlying Funds may be ``exchange-traded funds'' that are registered
under the Act as UITs or open-end management investment companies and
have received exemptive relief to sell their shares on a national
securities exchange at negotiated prices.\1\
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\1\ All Trusts that currently intend to rely on the requested
order are named as applicants. Any other Trust that relies on the
order in the future will comply with the terms and conditions of the
application.
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3. Applicants state that the requested relief will benefit
unitholders by providing investors with a professionally selected,
diversified portfolio of investment company shares through a single
investment vehicle.
Applicants' Legal Analysis
A. Section 12(d)(1)
1. Section 12(d)(1)(A) of the Act prohibits a registered investment
company from acquiring shares of an investment company if such
securities represent more than 3% of the total outstanding voting stock
of the acquired company, more than 5% of the total assets of the
acquiring company, or, together with the securities of any other
investment companies, more than 10% of the total assets of the
acquiring company. Section 12(d)(1)(B) of the Act prohibits a
registered open-end investment company from selling its shares to
another investment company if the sale will cause the acquiring company
to own more than 3% of the acquired company's voting stock, or if the
sale will cause more than 10% of the acquired company's voting stock to
be owned by investment companies generally. Section 12(d)(1)(C)
prohibits an investment company, other investment companies having the
same investment adviser, and companies controlled by such investment
companies, from acquiring more than 10% of the outstanding voting stock
of a registered closed-end management investment company.
2. Section 12(d)(1)(G) provides, in relevant part, that section
12(d)(1) will not apply to securities of a registered open-end
investment company or UIT acquired by a registered UIT if the acquired
company and the acquiring company are part of the same group of
investment companies, provided that certain other requirements
contained in section 12(d)(1)(G) are met. Applicants state that they
may not rely on section 12(d)(1)((G) because a Trust Series may invest
in Unaffiliated Funds in addition to Affiliated Funds.
3. Section 12(d)(1)(J) of the Act provides that the Commission may
exempt any person, security, or transaction or any class or classes of
persons, securities or transactions, from any provision of section
12(d)(1) if the exemption is consistent with the public interest and
the protection of investors. Applicants request an exemption under
section 12(d)(1)(J) to permit a Trust Series to acquire shares of a
Fund and to permit a Fund to sell shares to a Trust Series beyond the
limits set forth in sections 12(d)(1)(A), (B) and (C).
4. Applicants state that the proposed arrangement will not give
rise to the policy concerns underlying sections
[[Page 66891]]
12(d)(1)(A), (B) and (C), which include concerns about undue influence
by a fund of funds over underlying funds, excessive layering of fees,
and overly complex fund structures. Accordingly, applicants believe
that the requested exemption is consistent with the public interest and
the protection of investors.
5. Applicants state that the proposed arrangement will not result
in undue influence by a Trust Series or its affiliates over Funds. To
limit the control that a Trust Series may have over an Unaffiliated
Fund, applicants propose a condition prohibiting the Sponsor, the Trust
Series, and certain affiliates (individually or in the aggregate) from
controlling an Unaffiliated Fund within the meaning of section 2(a)(9)
of the Act. To further limit the potential for undue influence over
Unaffiliated Funds, applicants propose conditions 2 through 6, stated
below, to preclude a Trust Series and its affiliated entities from
taking advantage of an Unaffiliated Fund with respect to transactions
between the entities and to ensure that transactions will be on an
arm's length basis.
6. As an additional assurance that an Unaffiliated Underlying Fund
understands the implication of an investment by a Trust Series under
the requested order, prior to a Trust Series investment in an
Unaffiliated Underlying Fund in excess of the limit in section
12(d)(1)(A)(i), the Trust Series and Unaffiliated Underlying Fund will
execute an agreement stating that the board of directors of the
Unaffiliated Underlying Fund and the investment adviser to the
Unaffiliated Underlying Fund understand the terms and conditions of the
order and agree to fulfill their responsibilities under the order.
Applicants note that an Unaffiliated Underlying Fund may choose to
reject an investment from the Trust Series.
7. Applicants do not believe that the proposed arrangement will
result in excessive layering of fees. Applicants state that a condition
to the order would provide that any sales charges and/or service fees
(as those terms are defined in Rule 2830 of the Conduct Rules of the
National Association of Securities Dealers (``NASD Conduct Rules'')
charged with respect to Units of a Trust Series will not exceed the
limits applicable to a fund of funds as set forth in Rule 2830 of the
NASD Conduct Rules. In addition, the trustee to a Trust Series
(``Trustee'') will waive or offset fees otherwise payable by the Trust
Series in an amount at least equal to any compensation (including fees
paid pursuant to a plan adopted by an Unaffiliated Underlying Fund
under rule 12b-1 under the Act (``12b1-Fees'')) received by the Sponsor
or Trustee, or an affiliated person of the Sponsor or Trustee, from an
Unaffiliated Fund in connection with the investment by a Trust Series
in the Unaffiliated Fund.
8. Applicants believe that the proposed arrangement will not create
an overly complex fund structure. Applicants note that a Fund will be
prohibited from acquiring securities of any investment company in
excess of the limits contained in section 12(d)(1)(A) of the Act.
Applicants also represent that a Trust Series' prospectus and sales
literature will contain concise, ``plain English'' disclosure designed
to inform investors of the unique characteristics of the trust of funds
structure, including, but not limited to, its expense structure and the
additional expenses of investing in Funds.
B. Section 17(a)
1. Section 17(a) of the Act generally prohibits sales or purchases
of securities between a registered investment company and any
affiliated person of the company. Section 2(a)(3) of the Act defines an
``affiliated person'' of another person to include (a) any person
directly or indirectly owning, controlling, or holding with power to
vote, 5% or more of the outstanding voting securities of the other
person; (b) any person 5% or more of whose outstanding voting
securities are directly or indirectly owned, controlled, or held with
power to vote by the other person; and (c) any person directly or
indirectly controlling, controlled by, or under common control with the
other person.
2. Applicants state that a Trust Series and Affiliated Funds might
be deemed to be under the common control of the Sponsor or an entity
controlling, controlled by, or under common control with the Sponsor.
Applicants also state that a Trust Series and a Fund might become
affiliated persons if the Trust Series acquires more than 5% of the
Fund's outstanding voting securities. In light of these possible
affiliations, section 17(a) could prevent a Fund from selling shares to
and redeeming shares from a Trust Series.
3. Section 17(b) of the Act authorizes the Commission to grant an
order permitting a transaction otherwise prohibited by section 17(a) if
it finds that (a) the terms of the proposed transaction are fair and
reasonable and do not involve overreaching on the part of any person
concerned; (b) the proposed transaction is consistent with the policies
of each registered investment company involved; and (c) the proposed
transaction is consistent with the general purposes of the Act. Section
6(c) of the Act permits the Commission to exempt any person or
transactions from any provision of the Act if such exemption is
necessary or appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the policy
and provisions of the Act.
4. Applicants submit that the proposed arrangement satisfies the
standards for relief under sections 6(c) and 17(b) of the Act.
Applicants state that the terms of the arrangement are fair and
reasonable and do not involve overreaching. Applicants note that the
consideration paid for the sale and redemption of shares of the Funds
will be based on the net asset values of the Funds. Applicants state
that the proposed arrangement will be consistent with the policies of
each Trust Series and Fund, and with the general purposes of the Act.
Applicants' Conditions
Applicants agree that the order granting the requested relief will
be subject to the following conditions:
1. (a) The Sponsor, (b) any person controlling, controlled by, or
under common control with the Sponsor, and (c) any investment company
and any issuer that would be an investment company but for section
3(c)(1) or section 3(c)(7) of the Act sponsored or advised by the
Sponsor or any person controlling, controlled by, or under common
control with the Sponsor (collectively, the ``Group'') will not control
(individually or in the aggregate) an Unaffiliated Fund within the
meaning of section 2(a)(9) of the Act. If, as a result of a decrease in
the outstanding voting securities of an Unaffiliated Fund, the Group,
in the aggregate, becomes a holder of more than 25% of the outstanding
voting securities of the Unaffiliated Fund, the Group will vote its
shares in the same proportion as the vote of all other holders of the
Unaffiliated Fund's shares.
2. A Trust Series and its Sponsor, promoter, and principal
underwriter, and any person controlling, controlled by, or under common
control with any of those entities (each, a ``Trust Series Affiliate'')
will not cause any existing or potential investment by the Trust Series
in shares of an Unaffiliated Fund to influence the terms of any
services or transactions between the Trust Series or a Trust Series
Affiliate and the Unaffiliated Fund or its investment adviser, sponsor,
promoter, and principal underwriter, and any person controlling,
controlled by, or under
[[Page 66892]]
common control with any of those entities.
3. Once an investment by a Trust Series in the securities of an
Unaffiliated Underlying Fund exceeds the limits of section
12(d)(1)(A)(i) of the Act, the board of directors of the Unaffiliated
Underlying Fund, including a majority of the disinterested directors,
will determine that any consideratation paid by the Unaffiliated
Underlying Fund to a Trust Series or a Trust Series Affiliate in
connection with any services or transactions: (i) Is fair and
reasonable in relation to the nature and quality of the services and
benefits received by the Unaffiliated Underlying Fund; (ii) is within
the range of consideration that the Unaffiliated Underlying Fund would
be required to pay to another unaffiliated entity in connection with
the same services or transactions; and (iii) does not involve
overreaching on the part of any person concerned.
4. No Trust Series or Trust Series Affiliate will cause an
Unaffiliated Fund to purchase a security from any underwriting or
selling syndicate in which a principal underwriter is the Sponsor or a
person of which the Sponsor is an affiliated person (each an
``Underwriting Affiliate''). An offering during the existence of an
underwriting or selling syndicate of which a principal underwriter is
an Underwriting Affiliate is considered an ``Affiliated Underwriting.''
5. The board of directors of an Unaffiliated Underlying Fund,
including a majority of the disinterested directors, will adopt
procedures reasonably designed to monitor any purchases by the
Unaffiliated Underlying Fund of securities in Affiliated Underwritings
once an investment by a Trust Series in the securities of the
Unaffiliated Underlying Fund exceeds the limits of section
12(d)(1)(A)(i) of the Act, including any purchases made directly from
an Underwriting Affiliate. The board of directors will review these
purchases periodically, but no less frequently than annually, to
determine whether the purchases were influenced by the investment by
the Trust Series in shares of the Unaffiliated Underlying Fund. The
board of directors will consider, among other things, (i) whether the
purchases were consistent with the investment objectives and policies
of the Unaffiliated Underlying Fund; (ii) how the performance of
securities purchased in an Affiliated Underwriting compares to the
performance of comparable securities purchased during a comparable
period of time in underwritings other than Affiliated Underwritings or
to a benchmark such as a comparable market index; and (iii) whether the
amount of securities purchased by the Unaffiliated Underlying Fund in
Affiliated Underwritings and the amount purchased directly from
Underwriting Affiliates have changed significantly from prior years.
The board of directors shall take any appropriate actions based on its
review, including, if appropriate, the institution of procedures
designed to assure that purchases of securities from Affiliated
Underwritings are in the best interests of shareholders.
6. An Unaffiliated Underlying Fund shall maintain and preserve
permanently in an easily accessible place a written copy of the
procedures described in the preceding condition, and any modifications,
and shall maintain and preserve for a period not less than six years
from the end of the fiscal year in which any purchase from an
Affiliated Underwriting occurred, the first two years in an easily
accessible place, a written record of each purchase made once an
investment by a Trust Series in the securities of an Unaffiliated
Underlying Fund exceeded the limits of section 12(d)(1)(A)(i) of the
Act, setting forth from whom the securities were acquired, the identity
of the underwriting syndicate's members, the terms of the purchase, and
the information or materials upon which the board's determinations were
made.
7. Prior to an investment by a Trust Series in an Unaffiliated
Underlying Fund in excess of the limit in section 12(d)(1)(A)(i), the
Trust Series and the Unaffiliated Underlying Fund will execute an
agreement stating, without limitation, that the board of directors of
the Unaffiliated Underlying Fund and the investment adviser to the
Unaffiliated Underlying Fund understand the terms and conditions of the
order and agree to fulfill their responsibilities under the order. At
the time of its investment in shares of an Unaffiliated Underlying Fund
in excess of the limit in section 12(d)(1)(A)(i), a Trust Series will
notify the Unaffiliated Underlying Fund of the investment. At such
time, the Trust Series also will transmit to the Unaffiliated
Underlying Fund a list of the names of each Trust Series Affiliate and
Underwriting Affiliate. The Trust Series will notify the Unaffiliated
Underlying Fund of any changes to the list as soon as reasonably
practicable after a change occurs. The Unaffiliated Underlying Fund and
the Trust Series will maintain and preserve a copy of the order, the
agreement, and the list with any updated information for a period not
less than 6 years from the end of the fiscal year in which any
investment occurred, the first 2 years in an easily accessible place.
8. The Trustee will waive or offset fees otherwise payable by a
Trust Series in amount at least equal to any compensation (including
12b-1 Fees) received by the Sponsor or Trustee, or an affiliated person
of the Sponsor or Trustee, from an Unaffiliated Fund in connection with
the investment by a Trust Series in the Unaffiliated Fund.
9. Any sales charges and/or service fees (as those terms are
defined in rule 2830 of the NASD Conduct Rules) charged with respect to
Units of a Trust Series will not exceed the limits applicable to a fund
of funds as set forth in rule 2830 of the NASD Conduct Rules.
10. No Fund will acquire securities of any other investment company
in excess of the limits contained in section 12(d)(1)(A) of the Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-29657 Filed 11-26-03; 8:45 am]
BILLING CODE 8010-01-P