[Federal Register Volume 60, Number 76 (Thursday, April 20, 1995)]
[Notices]
[Pages 19801-19803]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-9724]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-21008; 812-9404]


Nike Securities L.P., et al.; Notice of Application

April 14, 1995.
Agency: Securities and Exchange Commission (``SEC'').

Action: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``Act'').

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Applicants: Nike Securities L.P. (the ``Sponsor'') and The First Trust 
of Insured Municipal Bonds, The First Trust GNMA, The First Trust of 
Insured Municipal Bonds--Multi-State, The First Trust Advantage Fund, 
The First Trust Special Situations Trust, The First Trust Combined 
Series (the ``Trusts''), and their respective series.

Relevant act Sections: Order requested pursuant to section 6(c) for 
exemptions from sections 2(a)(32), 2(a)(35), 22(d), and 26(a)(2) of the 
Act and rule 22c-1 thereunder, and pursuant to section 11(a) for an 
exemption from section 11(c).

Summary of Application: Applicants seek to impose sales charges on a 
deferred basis, waive the deferred sales charge in certain cases, and 
exchange Trust units having front-end and deferred sales charges.

Filing Date: The application was filed on December 30, 1994, and was 
amended on March 29, 1995.

Hearing or Notification of Hearing: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on May 9, 1995 and 
should be accompanied by proof of service on applicants, in the form of 
an affidavit or, for lawyers, a certificate of service. Hearing 
requests should state the nature of the writer's request, the reason 
for the request, and the issues contested. Persons may request 
notification of a hearing by writing to the SEC's Secretary.

Addresses: Secretary, SEC, 450 Fifth Street NW., Washington, DC 20549. 
Applicants, c/o Nike Securities L.P., 1001 Warrenville Road, suite 
3000, Lisle, Illinois 60532.

Supplementary Information: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch.

Applicants' Representations

    1. Each of the Trusts is a unit investment trust sponsored by the 
Sponsor. Each of the Trusts consists of one or more separate series 
(``Series''). Applicants request that the relief sought herein apply to 
any future Trusts sponsored by the Sponsor, and any future Series of 
the Trusts.
    2. Each Series is created by a trust indenture among the Sponsor, a 
banking institution or trust company as trustee, and an evaluator. The 
Sponsor acquires a portfolio of securities which it deposits with the 
trustee in exchange for certificates representing units of fractional 
undivided interest in the deposited portfolio (``Units''). The Units 
are then offered to the public through the Sponsor, underwriters, and 
dealers at a public offering price which, during the initial offering 
period, is based upon the aggregate offering side evaluation of the 
underlying securities plus a front-end sales charge. The sales charge 
currently ranges from 1.85% to 5.50% of the public offering price, 
generally depending on the terms of the underlying securities. The 
Sponsor may reduce the sales charge under certain circumstances, which 
will be disclosed in the prospectus. Any such reduction 
[[Page 19802]] will be made in accordance with rule 22d-1.
    3. Applicants seeks an order under section 6(c) exempting them from 
sections 2(a)(32), 2(a)(35), 22(d), 26(a)(2) of the Act and rule 22c-1 
thereunder, to the extent necessary to permit them to impose a deferred 
sales charge (``DSC'') on Units, and reduce or waive the DSC under 
certain circumstances. Under applicants' proposal, the Sponsor will 
determine the maximum amount of the sales charge per Unit. The Sponsor 
will have the discretion to defer the collection of all or part of such 
sales charge over a period (the ``Collection Period'') subsequent to 
the settlement date for the purchase of Units. The Sponsor will in no 
event add to the deferred amount of the sales charge any additional 
amount for interest or any similar or related charge to reflect or 
adjust for such deferral.
    4. The Sponsor anticipates collecting a portion of the total sales 
charge immediately upon purchase of Trust Units. The balance of the 
sales charge will be collected in installments over the Collection 
Period for the particular Trust Series. To the extent that distribution 
income is sufficient to pay a DSC installment, such deductions will be 
collected from distributions on a holder's Units (``Distribution 
Deductions''). If distribution income is insufficient to pay a DSC 
installment, the trustee, pursuant to the powers granted in the trust 
indenture, will have the ability to 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 as a DSC at the time of redemption or 
sale. The Sponsor does not presently intend to deduct the remainder of 
any DSC from sale or redemption proceeds.
    5. For purposes of calculating the amount of the DSC due upon 
redemption or sale of Units, it will be assumed that Units on which the 
sales charge has been paid in full are liquidated first. Any Units 
liquidated over and above such amounts will be subject to the DSC, 
which will be applied on the assumption that Units held for the longest 
time are redeemed first.
    6. The Sponsor may adopt a procedure of waiving the DSC in 
connection with redemptions or sales of Units under certain 
circumstances. Any such waiver will be disclosed in the prospectus for 
each Series subject to the waiver, and will be implemented in 
accordance with rule 22d-1.
    7. The Sponsor believes that the operation and implementation of 
the DSC program will be adequately disclosed and explained to potential 
investors as well as Unitholders. The prospectus for each Trust will 
describe the operation of the DSC, including the amount and date of 
each Distribution Deduction and the duration of the Collection Period. 
The prospectus will also contain disclosure pertaining to the Trustee's 
ability to sell Trust securities in the event that income generated by 
the Trust portfolio is partially or wholly insufficient to pay for DSC 
expenses. The securities confirmation statement for each Unitholder's 
purchase transaction will state both the front-end sales charge 
imposed, if any, and the amount of the DSC to be deducted in regular 
installments. In addition, each annual report will provide Unitholders 
with information as to the amount of annual DSC payments made by the 
Trust during the previous fiscal year on both a Series and per Unit 
basis.
    8. Applicants also seeks an order under section 11(a) exempting 
them from section 11(c) to the extent necessary to permit an exchange 
option (``Exchange Option''). The Exchange Option will extend to all 
exchanges of Units, regardless of whether such Units are subject to a 
front-end sales charge or a DSC. An investor who purchases Units under 
the Exchange Option will pay a lower aggregate sales charge than that 
which would be paid by a new investor. While Units of an applicable 
Series are normally sold on the secondary market with maximum sales 
charges ranging from 1.85% to 5.80% of the public offering price, the 
sales charge on Units acquired pursuant to the Exchange Option will 
generally be reduced to a flat fee of $20 per Unit ($20 per 100 Units 
in the case of a Series whose Units initially cost approximately $10 
per Unit, or $20 per 1,000 Units in the case of a Series whose Units 
initially cost approximately $1.00 per Unit). An adjustment will be 
made if Units of any Series are exchanged within five months of their 
acquisition for Units of a Series with a higher sales charge, or if 
Units that impose Distribution Deductions are exchanged for Units of a 
Series that imposes a front-end sales charge at any time before the 
Distribution Deductions have at least equaled the per Unit sales charge 
then applicable. In such cases, the exchange fee will be the greater of 
$20 per Unit (or its equivalent, depending on the cost of Units in a 
particular Series) or an amount which, together with the sales charge 
already paid on the Units being exchanged, equals the normal sales 
charge on the acquired Units.
    9. Under the Exchange Option, if DSC Units are exchanged for DSC 
Units of another Series, the reduced sales charge will be collected in 
connection with such an exchange. The Distribution Deductions will 
continue to be taken from the investment income generated by the newly 
acquired Units, or proceeds from the sale of Trust portfolio 
securities, as the case may be, until the original balance of the sales 
charge owed on the initial investment has been collected. The DSC will 
not be collected at the time of exchange, except in the case of any 
exchange to a Series not having a DSC.

Applicants' Legal Analysis

    1. Under section 6(c), the SEC may exempt any person or transaction 
from any provision of the Act or any rule thereunder to the extent that 
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.
    2. Section 2(a)(32) defines a ``redeemable security'' as a security 
that, upon its presentation to the issuer, entitles the holder to 
receive approximately his or her proportionate share of the issuer's 
current net assets, or the cash equivalent of those assets. Because the 
imposition of a DSC may cause a redeeming Unitholder to receive an 
amount less than the net asset value of the redeemed Units, applicants 
seek an exemption from section 2(a)(32) so that Units subject to a DSC 
are considered redeemable securities for purposes of the Act.\1\

    \1\Without an exemption, a Trust selling Units subject to a 
deferred sales charge could not meet the definition of a unit 
investment trust under section 4(2) of the Act. Section 4(2) defines 
a unit investment trust as an investment company that issues only 
``redeemable securities.''
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    3. Section 2(a)(35) defines the term ``sales load'' to be the 
difference between the sales price and the proceeds to the issuer, less 
any expenses not properly chargeable to sales or promotional expenses. 
Because a DSC is not charged at the time of purchase, an exemption from 
section 2(a)(35) is necessary.
    4. Rule 22c-1, promulgated pursuant to the Commission's authority 
under section 22(c), requires that the price of a redeemable security 
issued by an investment company for purposes of sale, redemption, and 
repurchase be based on the security's current net asset value. Because 
the imposition of a DSC may cause a redeeming Unitholder to receive an 
amount less than the net [[Page 19803]] asset value of the redeemed 
Units, applicants seek an exemption from this rule.
    5. Section 22(d) requires an investment company and its principal 
underwriter and dealer to sell securities only at a current public 
offering price described in the investment company's prospectus. 
Because sales charges traditionally have been a component of the public 
offering price, section 22(d) historically required that all investors 
be charged the same load. Rule 22d-1 was adopted to permit the sale of 
redeemable securities at prices which reflect scheduled variations in, 
or elimination of, the sales load. Because rule 22d-1 does not extend 
to scheduled variations in DSCs, applicants seek relief from section 
22(d) to permit them to waive or reduce their DSC in certain instances.
    6. Section 26(a)(2), in relevant part, prohibits a trustee or 
custodian of a unit investment trust from collecting from the Trust as 
an expense any payment to a depositor or principal underwriter thereof. 
Because of this prohibition, applicants need an exemption to permit the 
trustee to collect the DSC installments from Distribution Deductions or 
Trust assets.
    7. Applicants believe that implementation of the DSC program in the 
manner described above would be fair and in the best interests of the 
Unitholders of the Trusts. Thus, granting the requested order would be 
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.
    8. Section 11(c) prohibits any offers of exchange of the securities 
of a registered unit investment trust for the securities of any other 
investment company, unless the terms of the offer have been approved by 
the SEC. Applicants' assert that the reduced sales charge imposed at 
the time of exchange is a reasonable and justifiable expense to be 
allocated for the professional assistance and operational expenses 
incurred in connection with the Exchange Option.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Whenever the Exchange Option is to be terminated or its terms 
are to be amended materially, any holder of a security subject to that 
privilege will be given important notice of the impending termination 
or amendment at least 60 days prior to the date of termination or the 
effective date of the amendment, provided that: (a) No such notice need 
be given if the only material effect of an amendment is to reduce or 
eliminate the sales charge payable at the time of an exchange, to add 
one or more new Series eligible for the Exchange Option, or to delete a 
Series which has terminated; and (b) no notice need be given if, under 
extraordinary circumstances, either (i) there is a suspension of the 
redemption of Units of the Trust under section 22(e) of the Act and the 
rules and regulations promulgated thereunder, or (ii) a Trust 
temporarily delays or ceases the sale of its Units because it is unable 
to invest amounts effectively in accordance with applicable investment 
objectives, policies, and restrictions.
    2. An investor who purchases Units under the Exchange Option will 
pay a lower aggregate sales charge than that which would be paid for 
the Units by a new investor.
    3. The prospectus of each Trust offering exchanges and any sales 
literature or advertising that mentions the existence of the Exchange 
Option will disclose that the Exchange Option is subject to 
modification, termination, or suspension, without notice except in 
certain limited cases.
    4. Each Series offering Units subject to a DSC will include in its 
prospectus the table required by item 2 of Form N-1A (modified as 
appropriate to reflect the differences between unit investment trusts 
and open-end management investment companies) and a schedule setting 
forth the number and date of each installment payment.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-9724 Filed 4-19-95; 8:45 am]
BILLING CODE 8010-01-M