[Federal Register Volume 61, Number 208 (Friday, October 25, 1996)]
[Notices]
[Pages 55328-55330]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-27433]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22291; 812-10218]
First Trust Special Situations Trust and Nike Securities L.P.;
Notice of Application
October 21, 1996.
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: First Trust Special Situations Trust and Nike Securities
L.P.
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
for an exemption from section 12(d)(1)(F)(ii) of the Act.
SUMMARY OF APPLICATION: Applicants request an order that would permit
series of the Trust (each a ``Series'' or ``Trust Series''), to offer
units to the public with a sales load that exceeds the 1.5% sales load
limitation of section 12(d)(1)(F)(ii) of the Act.
FILING DATE: The application was filed on June 24, 1996 and amended on
September 5, 1996.
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
[[Page 55329]]
copy of the request, personally or by mail. Hearing requests should be
received by the SEC by 5:30 p.m. on November 15, 1996, 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 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 SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, 1001 Warrenville Road, Lisle, Illinois 60532.
FOR FURTHER INFORMATION CONTACT: Sarah A. Buescher, Staff Attorney, at
(202) 942-0573, or Alison E. Baur, 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
SEC's Public Reference Branch.
Applicants' Representations
1. The Trust is a registered unit investment trust. Each Trust
Series also will be a unit investment trust, and will be similar but
separate and designated by a different Series number. Applicants
request relief of behalf of the Trust and certain subsequent Trust
Series. Nike Securities L.P. is the sponsor for each Trust Series (the
``Sponsor''). Each Series will be created under state law pursuant to a
trust agreement which will contain information specific to that Series
and which will incorporate by reference a master trust agreement
between the Sponsor and a financial institution that satisfies the
criteria in section 26(a) of the Act (the ``Trustee''). The trust
agreement and the master trust agreement are referred to collectively
as the ``Trust Agreement.''
2. Each Series will contain a portfolio of shares of investment
companies or series thereof (the ``Funds'') that are not affiliated
with any of the applicants. Each Series may invest either in only one
type of investment company or in a combination of the various types of
investment companies. The shares of the underlying Funds will be
deposited in each Trust Series at net asset value, or if the Fund
shares are listed on a national securities exchange or traded on the
Nasdaq National Market System (``Nasdaq-NMS''), at ``market value.''
Market value will be determined by an evaluator, and generally will be
based on the closing sale prices of the securities or, if unavailable,
the closing asking prices of the securities.
3. Each underlying Fund may be registered as an open-end investment
company, a closed-end investment company, or a unit investment company,
or a unit investment trust. In addition, an underlying Fund may be an
``Exchange Fund.'' An exchange Fund may be registered as an open-end
investment company or a unit investment trust, but it has received
exemptive relief to sell its shares at ``negotiated prices'' on an
exchange in the same manner as other equity securities.\1\
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\1\ See, e.g., Foreign Fund Inc., Investment Company Act Release
Nos. 21737 (Feb. 6, 1996) (notice) and 21803 (Mar. 5, 1996) (order);
and SPDR Trust, Investment Company Act Release Nos. 18959 (Sept. 17,
1992) (notice) and 19055 (Oct. 26, 1992) (order).
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4. Simultaneously with the deposit of Fund shares into a Trust
Series, the Trustee will deliver to the Sponsor registered certificates
for units (``Units'') that represent ownership of the Trust Series.
During the initial public offering, the Units will be offered at prices
based on the aggregate underlying value of the securities deposited in
a Trust Series, plus a sales charge. The sales charge (either a front
end, deferred sales load, \2\ or a combination thereof) shall not, when
aggregated with any sales charge or service fees paid by the Trust
Series with respect to securities of the underlying Funds, exceed the
limits set forth in Rule 2830(d) of the NASD's Conduct Rules.
Applicants state that the Trust Series may incur customary brokerage
commissions associated with purchasing securities on the secondary
market. No Trust Series will invest in an underlying Fund with a rule
12b-1 plan unless the Fund's rule 12b-1 fees do not exceed a maximum
annual rate of .25% of the respective Fund's average daily net assets.
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\2\ The Trust received exemptive relief to assess a deferred
sales load. See Nike Securities L.P., et al., Investment Company Act
Release Nos. 21008 (Apr. 14, 1995) (notice) and 21059 (May 10, 1995)
(order).
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Applicant's Legal Analysis
1. Section 12(d)(1)(A) of the Act provides that no registered
investment company may acquire securities issued by another investment
company if such securities represent more than 3% of the total
outstanding voting stock of the acquired company, more than 5% of the
value of the total assets of the acquiring company, or if securities
issued by the acquired company and all other investment companies have
an aggregate value in excess of 10% of the value of the total assets of
the acquiring company.
2. Section 12(d)(1)(F) provides that section 12(d)(1) shall not
apply to securities purchased or otherwise acquired by a registered
investment company if immediately after the purchase or acquisition not
more than 3% of the total outstanding stock of the acquired company is
owned by the acquiring company and the acquiring company does not offer
or sell any security issued by it which includes a sales load of more
than 1.5%. In addition, no issuer of any security purchased or acquired
by the acquiring company shall be obligated to redeem such security in
an amount exceeding 1% of such issuer's total outstanding securities
during any period of less than 30 days. Applicants request relief under
section 6(c) of the Act from the 1.5% sales load limitation of section
12(d)(1)(F)(ii) so that a Trust Series can offer Units subject to a
sales load of greater than 1.5% of the public offering price.
3. Section 6(c) provides that the SEC may exempt any person or
transaction 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. Applicants believe that the requested order
satisfies this standard.
4. Applicants argue that section 12(d)(1) is intended to mitigate
or eliminate abuses that might arise when one investment company
acquires shares of another investment company. These abuses include:
(a) the layering of sales charges, advisory fees, and administrative
costs; (b) the imposition of undue influence by the acquiring fund over
the acquired funds through the threat of large scale redemptions; (c)
the acquisition by the acquiring fund of voting control of the acquired
company; and (d) the creation of a complex pyramidal structure that may
be confusing to investors. Applicants do not believe that these abuses
are present in their proposed trust of funds structure.
5. Applicants state that the structure of the Trust Series will not
result in excessive fees. Each Trust Series, as a unit investment
trust, has an unmanaged portfolio and, therefore, does not assess
advisory fees. Unitholders would bear their portion of advisory fees
changed by the underlying Funds for services rendered by each Fund's
respective investment adviser. Applicants contend that there will be no
overlapping of sales charges or distribution fees. While each Trust
Series will charge a sales load, the Sponsor will deposit the Fund
shares in
[[Page 55330]]
the Trust Series at net asset value, or if shares of the Funds are
traded on an exchange or Nasdaq-NMS, at their market value. In
addition, each Trust Series, as a unit investment trust, does not
charge a rule 12b-1 fee, and no Trust Series would invest in a Fund
with a rule 12b-1 plan unless the Fund limits its rule 12b-1 fee to a
maximum annual rate of .25% of the Fund's average daily net assets.
Applicants also have agreed as a condition to relief that any sales
charge assessed with respect to the Units of a Trust Series, when
aggregated with any sales charges and service fees paid by the Trust
Series with respect to securities of the underlying Funds, shall not
exceed the limits set forth in Rules 2830(d) of the Conduct Rules of
the NASD. As a result, the aggregate sales charges will not exceed the
limit that otherwise lawfully could be charged at any single level.
6. Administrative fees may be charged at both the Trust Series and
underlying Fund levels. However, applicants believe that certain Trust
expenses may be reduced under the proposed arrangement. When the Trust
Series invest in shares of open-end investment companies, applicants
anticipate that the evaluator would charge a lower fee, if any at all.
A Trust Series may incur a customary brokerage commission in connection
with Fund shares purchased on an exchange or Nasdaq-NMS, but applicants
represent that the Sponsor will purchase the Fund shares in the
secondary market, thereby avoiding the payment of any underwriting
spreads common during an initial offering.
7. Applicants argue that the concerns of large-scale redemptions is
not applicable with regard to underlying closed-end Funds because they
do not issue redeemable securities. For redeemable securities, section
12(d)(1)(F) provides that an underlying Fund will not be obligated to
redeem its securities in an amount exceeding 1% of the issuer's total
outstanding securities during any period of less than 30 days, and
applicants will comply with this provision. Applicants also believe
that the unmanaged nature of the Trust limits large scale redemptions
because each Trust Series is limited as to when it may sell portfolio
securities.
8. Applicants believe that the concern of pyramiding of voting
control by a Trust Series over the underlying Funds does not arise in
its proposal because section 12(d)(1)(F) requires the Trust Series to
exercise the voting rights with respect to any securities acquired in
the manner prescribed by section 12(d)(1)(E). Section 12(d)(1)(E)
requires the acquiring investment company either to seek instructions
from its security holders with regard to the voting of all proxies with
respect to such security and to vote such proxies only in accordance
with such instructions, or to vote the shares held by it in the same
proportion as the vote of all other holders of the security.
9. Applicants believe that the concern about undue complexity in
its arrangement is addressed by its condition that each Trust Series
will not invest in an underlying Fund that, at the time of acquisition,
owns securities of any other investment company in excess of the limits
in section 12(d)(1)(A). If subsequent to a Trust Series' acquisition of
Fund shares, the Fund acquires securities of other investment companies
in excess of section 12(d)(1)'s limits, the Trust Series will not be
required to divest itself of its holdings. Applicants argue that
because the underlying Funds are not affiliated with the Trust, a Trust
Series cannot bind or control the Funds.
10. Applicants also believe that the proposed trust of funds
structure will be adequately disclosed and explained to investors in
each Series' prospectus. Applicants represent that they will disclose
all loads, fees, expenses, and charges incurred with an investment in
the respective Trust Series in the prospectus. The prospectus also will
include disclosure that investors will pay indirectly a portion of the
expenses of the underlying Funds. In addition, each Series will include
the table required by item 2 of Form N-1A (modified as appropriate to
reflect the differences between unit investment trusts and open-end
investment companies) to set forth the Series' operating expenses and
Unitholders' transaction costs.
11. Applicants believe that it is appropriate to apply the NASD's
rules to the proposed arrangement instead of the sales load limitation
in section 12(d)(1)(F)(ii). Applicants argue that the NASD's specific
sales charge rules, which were recently amended to limit asset-based
sales charges and service fees, more accurately reflect the current
methods used by funds to finance sales expenses, while section
12(d)(1)(F), adopted more than 25 years ago, does not reflect the
changes in the industry's pricing practices.
12. Applicants believe that, given the number and variety of funds
now available for investment, a Trust Series provides a simple means
through which investors can obtain a professionally selected and
maintained mix of investment company shares for a relatively small
initial investment. Applicants also believe that the Trust Series
provides investors an opportunity to participate in a diversified
portfolio of investment company shares in one package and at one sales
load.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. Each Trust Series will comply with section 12(d)(1)(F) in all
respects except for the sales load limitation of section
12(d)(1)(F)(ii).
2. Any sales charges or service fees charged with respect to Units
of a Trust Series, when aggregated with any sales charges or service
fees paid by the Trust Series with respect to securities of the
underlying Funds, shall not exceed the limits set forth in Rule 2830(d)
of the NASD's Conduct Rules.
3. No Trust Series will acquire securities of an underlying Fund
which, at the time of acquisition, owns 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,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-27433 Filed 10-24-96; 8:45 am]
BILLING CODE 8010-01-M