[Federal Register Volume 64, Number 111 (Thursday, June 10, 1999)]
[Notices]
[Pages 31326-31330]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-14757]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23458; File No. 812-11518]


First Defined Portfolio Fund LLC

June 4, 1999.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the 
``Commission'').

ACTION: Notice of application for an order pursuant to Section 6(c) of 
the Investment Company Act of 1940 (the ``1940 Act'' or the ``Act'').

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SUMMARY OF APPLICATION: Applicant seeks an order pursuant to Section 
6(c) of the Act exempting Applicant and any other open-end investment 
company or series thereof advised by First Trust Advisors L.P. ``First 
Trust Advisors'') or any entity controlled by or under common control 
with First Trust Advisors that follows the same investment strategy as 
the Target 10 Series, the Target 5 Series, or the Global Target 15 
Series, from the provisions of Section 12(d)(3) of the 1940 Act top the 
extent necessary to permit the Target 10 Series to invest up to 10.5%, 
the Target 5 Series to invest up to 20.5%, and the Global Target 15 
Series to invest up to 7.5%, of their respective total assets in 
securities of issuers that derive more than 15% of their gross revenues 
from securities related activities.
    Applicant: First Defined Portfolio Fund LLC.
    Filing Date: The application was filed on February 18, 1999, 
amended and restated on May 25, 1999, and on June 3, 1999.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the Commission orders a hearing. 
Interested persons may request

[[Page 31327]]

a hearing on this application by writing to the Secretary of the SEC 
and serving Applicant with a copy of the request, personally or by 
mail. Hearing requests must be received by the Commission by 5:30 p.m. 
on June 30, 1999, and accompanied by proof of service on the Applicant 
in the form of an affidavit or, for lawyers, a certificate of service. 
Hearing request should state the nature of the interest, the reason for 
the request and the issues contested. Persons may request notification 
of the date of a hearing by writing to the Secretary of the Commission.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549-0609. Applicant, 1001 Warrenville Road, Lisle, Illinois 60532, 
Suite 300.

FOR FURTHER INFORMATION CONTACT:
Martha Peterson, Attorney, or Susan Olson, Branch Chief, Office or 
Insurance Products, Division of Investment Management, at (202) 942-
0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee from the 
Public Reference Branch of the SEC, 450 Fifth Street, N.W., Washington, 
D.C. 20549-0609 (tel. (202) 942-8090).

Applicant's Representations

    1. First Defined Portfolio Fund LLC (the ``Fund'' or the 
``Applicant'') is a registered, open-end management investment company 
(File No. 811-09235). It currently consists of seven series: the 
DOWSM Target 5 Portfolio (i.e., the Target 5 Series), the 
DowSM Target 10 Portfolio (i.e., the Target 10 Series), the 
Global Target 15 Portfolio (i.e., the Global Target 15 Series), the 
Target 10 Large Cap Portfolio, the Target 15 Large Cap Portfolio, the 
Target Small Cap Portfolio and the 10 Uncommon Values Portfolio 
(collectively, the ``Current Fund Series''). Applicant was organized 
under the laws of Delaware as a limited liability company on January 8, 
1999. Under Delaware law, limited liability company does not issue 
shares of stock. Instead, ownership rights are contained in membership 
interests. Each membership interest of Applicant (``Interest'') 
represents an undivided interest in the stocks held in one of 
Applicant's portfolios.
    2. Interests in the Fund and any future fund relying on the 
application are not and will not be offered directly to the public but 
will be offered to separate accounts which serve as funding vehicles 
for variable annuity contracts and other variable insurance products. 
Interests of each Current Fund Series are sold only to American Skandia 
Life Assurance Corporation Variable Account B (``Account B''), to fund 
the benefits of variable annuity policies issued by American Skandia 
Life Assurance Corporation (``American Skandia''). The variable annuity 
owners of Account B who have contract values allocated to any of the 
Applicant's portfolios have indirect beneficial rights in the Interests 
and have the right to instruct American Skandia with regard to how it 
votes the Interests that it holds in its variable annuity separate 
accounts.
    3. First Trust Advisors is the advisor of each of the Funds's 
series.
    4. Applicant states that the portfolio of the Target 10 Series 
consists of an investment portfolio of the common stocks of the ten 
companies in the Dow Jones Industrial Average (the ``Dow'') having the 
highest dividend yields as of a date specified in the prospectus (the 
``Stock Selection Date''). These ten companies are popularly known as 
the ``Dogs of the Dow.'' Applicant also states that take portfolio of 
the Target 5 Series consists of the common stock of the five companies 
with the lowest per share stock price of the ten companies in the Dow 
that have the highest dividend yields as of the Stock Selection Date 
specified in the prospectus. Finally, Applicant states that the 
portfolio of the Global Target 15 Series consists of the common stocks 
of the five companies with the lowest per share stock price of the ten 
companies in each of the Dow, the Financial Times Industrial Ordinary 
Share Index (``FT Index''), and the hang Seng Index, respectively, that 
have the highest dividend yields in the respective index as of the 
applicable Stock Selection Date.
    5. Applicant states that on the initial Stock Selection Date, First 
Trust Advisors will establish the percentage relationships among the 
portfolio securities of each issuer held by the Target 5 Series, the 
Target 10 Series and the Global Target 15 Series (the ``Series''), 
respectively, for the period until the Series are rebalanced. The 
Target 5 Series, the Target 10 Series and Global Target 15 Series are 
adjusted annually on their Stock Selection Date. The Target 5 Series, 
the Target 10 Series and the Global Target 15 Series intend to invest 
in the portfolio securities determined by their respective strategies 
in relatively equal amounts. When additional amounts are invested in 
the Target 5 Series, the Target 10 Series and the Global Target 15 
Series, additional securities will be purchased in numbers reflecting 
as closely as practicable the percentage relationship of the number of 
securities established on the Stock Selection Date. Similarly, sales of 
securities by each Series will attempt to replicate the percentage 
relationship of securities held in the portfolio of each Series. The 
percentage relationship among the number of securities in the Target 5 
Series, the Target 10 Series and the Global Target 15 Series should 
therefore remain relatively stable until the Series are rebalanced. On 
the Stock Selection Date each year, First Trust Advisors will rebalance 
the portfolios with a new mix of securities in the Target 5 Series, the 
Target 10 Series and the Global Target 15 Series selected pursuant to 
the investment strategy of each Series. Applicant states that, given 
the fact that the market price of portfolio securities will vary after 
the Stock Selection Date, the value of the securities of each company 
as compared to the total assets of the Target 5 Series, the Target 10 
Series and the Global Target 15 Series will fluctuate above and below 
the proportion established on the Stock Selection Date.
    6. Applicant states that the Target 5 Series, the Target 10 Series 
and the Global Target 15 Series intend to invest in their portfolio 
securities determined by their respective strategies in relatively 
equal amounts and the Series may purchase securities in odd lots to 
achieve this goal. However, it may be more efficient for a Series to 
purchase securities in 100 or 50 share lots or in board lot size in the 
case of the Global Target 15 Series. A ``board lot'' is comprised of a 
fixed number of shares determined by the issuer. Most fees associated 
with trading, settling, and transfer of Hong Kong securities are 
charged on a per board lot basis. Accordingly, Applicant states that it 
is more efficient for the Global Target 15 Series to purchase 
securities in the specified board lot size. As a result, securities of 
a securities related issuer may represent (i) more than 10% but in no 
event more than 10.5% of the value of the Target 10 Series' total 
assets; (ii) more than 20%, but in no event more than 20.5% of the 
value of the Target 5 Series' total assets; and (iii) more than 6.7%, 
but in no event more than 7.5% of the value of the Global Target 15 
Series, as of the close of business on the business day following the 
applicable Stock Selection Date. Although each Series will strive to 
purchase equal values of each of the stocks represented in a Series' 
portfolio, Applicant believes the flexibility to deviate slightly from 
this requirement is appropriate because it enables a Series to meet its 
purchase requirements while trying to obtain the best price. Applicant 
states that this is particularly important for the Global Target 15 
Series because it is more

[[Page 31328]]

efficient to purchase Hong Kong securities on a board lot basis. 
Applicant submits that because the size of board lots vary widely, it 
is appropriate to permit the Global Target 15 Series to invest up to 
7.5% of the value of its asset as of the close of business on the 
business day following the Stock Selection Date in the securities of a 
securities related issuer.
    7. Applicant states that the objective of the Target 10 Series, the 
Target 5 Series and the Global Target 15 Series is to provide above-
average total return. Each of these Series seeks its objective by 
investing in common stocks issued by companies that are expected to 
provide income and to have the potential for capital appreciation. 
These Series may or may not achieve that objective. Applicant states 
that the stocks held in these Series are not expected to reflect the 
entire applicable index or indices, and the prices of Interests are not 
intended to parallel or correlate with movements in the applicable 
index or indices. Applicant states that, generally, it will not be 
possible for all of the funds in the Target 10 Series Target 5 Series 
and Global Target 15 Series to be 100% invested in the prescribed mix 
of stocks at any time. Applicant states that First Trust Advisors will 
try, to the extent practicable, to maintain a minimum cash position at 
all times. Applicant represents that normally the only cash items held 
will represent amounts expected to be deducted as charges and amounts 
too small to purchase additional proportionate rounds lots of the 
portfolio securities.
    8. The Dow consists of 30 stocks selected by Dow Jones & Company, 
Inc. as representative of the broader domestic stock market and of 
American industry. Applicant states that the Dow Jones & Company, Inc. 
is not affiliated with it and had not participated, and will not 
participate, in any way in the management of the Target 10 Series, 
Target 5 Series, or Global Target 15 Series or the selection of the 
stock purchased by such Series.
    9. The FT Index consists of common stocks listed on the London 
Stock Exchange which are chosen by the editors of The Financial Times 
(London). The FT Index is an unweighted average of 30 companies 
representative of British industry and commerce. The companies in the 
FT Index are highly capitalized, major factors in their industries, and 
their stocks are widely held by individuals and institutional 
investors. All companies in the FT Index are listed and traded on the 
London Stock Exchange. The publishers of the FT Index are unaffiliated 
with the Fund and First Trust Advisors and do not participate in any 
way in the management of any Series or the selection of stocks 
purchased for a Series. Changes in the components of the FT Index are 
made entirely by the editors of The Financial Times without 
consultation with the companies, the stock exchange or any official 
agency. For the sake of continuity, changes are rarely made.
    10. The Hang Seng Index consists of 33 of the 358 stocks currently 
listed on the Stock Exchange of Hong Kong Ltd. (the ``Hong Kong Stock 
Exchange''). The Hang Seng Index is representative of four major market 
sectors: commerce and industry, finance, properties, and utilities. The 
Hang Seng Index is a recognized indicator of stock market performance 
in Hong Kong. In computing the Hang Seng Index, the companies included 
therein are weighted by market capitalization and therefore the index 
is strongly influenced by stocks with large capitalizations. The 
publishers of the Hang Seng Index are unaffiliated with the Fund and 
First Trust Advisors and do not participate in any way in the 
management of any Series or the selection of stocks purchased for a 
Series.
    11. Applicant states that it is not a ``regulated investment 
company'' under Subchapter M of the Internal Revenue Code of 1986, as 
amended (the ``Code''). Nonetheless, Applicant states that it does not 
pay federal income tax on its interest, dividend income or capital 
gains. As a limited liability company whose interests are sold only to 
Account B, Applicant states that it is disregarded as an entity for 
purposes of federal income taxation. Applicant states that American 
Skandia, through its variable annuity separate accounts, is treated as 
owning the assets of the portfolios directly and its tax obligations 
thereon are computed pursuant to Subchapter L of the Code (which 
governs the taxation of insurance companies). Applicant states that 
under current tax law, interest, dividend income and capital gains of 
Applicant are not taxable to Applicant, and are not currently taxable 
to American Skandia or to contract owners, when left to accumulate 
within a variable annuity contract.
    12. Section 817(h) of the Code provides that in order for a 
variable contract which is based on a segregated asset account to 
qualify as an annuity contract under the Code, the investment made by 
that account must be ``adequately diversified'' in accordance with 
Treasury regulations.
    13. Applicant states that the Target 10 Series, Target 5 Series and 
Global Target 15 Series must comply with the Section 817(h) 
diversification requirements. Therefore, Applicant states that First 
Trust Advisors may depart from the portfolio investment strategy, if 
necessary, in order to satisfy the Section 817(h) diversification 
requirements. Applicant represents that in all circumstances, except in 
order to meet Section 817(h) diversification requirements, the common 
stocks purchased for each portfolio will be chosen solely according to 
the applicable formula described above and will not be based on the 
research opinions or buy or sell recommendations of First Trust 
Advisors.
    14. Applicant represents that First Trust Advisors does not have 
any discretion as to which common stocks are purchased. Applicant 
states that securities purchased for the Target 10 Series, Target 5 
Series, and Global Target 15 Series may include securities of issuers 
in the Dow (and with respect to the Global Target 15 Series, issuers in 
the FT Index and the Hang Seng Index as well as the Dow) that derived 
more than 15% of their gross revenues in their most recent fiscal year 
from securities related activities.

Applicant's Legal Analysis

    1. Section 12(d)(3) of the Act, with limited exceptions, prohibits 
an investment company from acquiring any security issued by any person 
who is a broker, dealer, underwriter, or investment adviser. Rule 12d3-
1 under the Act exempts from Section 12(d)(3) purchases by an 
investment company of securities of an issuer, except its own 
investment adviser, promoter, or principal underwriter or their 
affiliates, that derived more than 15% of its gross revenues in its 
most recent fiscal year from securities related activities, provided 
that, among other things, immediately after any such acquisition the 
acquiring company has invested not more than 5% of the value of its 
total assets in the securities of the issuer. The Target 10 Series, 
Target 5 Series, and Global Target 15 Series undertake to comply with 
all of the requirements of Rule 12d3-1, except the condition in 
subparagraph (b)(3) prohibiting an investment company from investing 
more than 5% of the value of its total assets in securities related 
issuer.
    2. Section 6(c) of the Act provides that the Commission by order 
upon application may, conditionally or unconditionally, exempt any 
person, security, or transaction, or any class or classes thereof, from 
any provision of the Act or any rule or regulation thereunder, if and 
to the extent that the

[[Page 31329]]

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.
    3. Applicant states that Section 12(d)(3) was intended: (a) to 
prevent investment companies from exposing their assets to the 
entrepreneurial risks of securities related businesses, (b) to prevent 
potential conflicts of interests; (c) to eliminate certain reciprocal 
practices between investment companies and securities related business; 
and (d) to ensure that investment companies maintain adequate liquidity 
in their portfolios.
    4. A potential conflict could occur, for example, if an investment 
company purchased securities or other interests in a broker-dealer to 
reward that broker-dealer for selling fund shares, rather than solely 
in the basis of investment merit. Applicant states that this concern 
does not arise in this situation. Applicant states that generally, 
neither the Applicant nor First Trust Advisors has discretion in 
choosing the common stock or amount purchased. Applicant states that 
the stock must first be included in the applicable index or indices 
(which along with the publishers of the indices are unaffiliated with 
Applicant and First Trust Advisors). In addition, with respect to the 
Target 10 Series, the stock must also qualify as one of the ten 
companies in the Dow that has the highest dividend yields as of the 
Stock Selection Date. With respect to the Target 5 Series, the stock 
must qualify as one of the five companies with the lowest per share 
stock price of the ten companies in the Dow that have the highest 
dividend yields as of the Stock Selection Date. Finally, with respect 
to the Global Target 15 Series, the stock must qualify as one of the 
five companies with the lowest per share stock price of the ten 
companies in each of the Dow, FT Index, and Hang Seng Index, 
respectively, that has the highest dividend yields in the respective 
index as of the Stock Selection Date.
    5. Applicant states that the relief requested is substantially 
similar to that granted to management companies serving as investment 
options underlying variable annuities. In addition, Applicant states 
that the Commission has granted similar Section 12(d)(3) relief to unit 
investment trusts with no discretion to choose the portfolio securities 
or the amount purchased, but with discretion to sell portfolios 
securities to the extent necessary to meet redemptions, pay expenses, 
and in other limited circumstances.
    6. Applicant states that First Trust Advisors is obligated to 
follow the applicable investment formula described above as nearly as 
practicable. Applicant states that, like prior applicants for Section 
12(d)(3) relief, securities purchased for each portfolio will be chosen 
with respect to the specified formula. Applicant states that the only 
time any deviation from the formula would be permitted would be where 
circumstances were such that the investments of a particular portfolio 
would fail to be ``adequately diversified'' under the Section 817(h) 
diversification requirements, and would thus cause the annuity 
contracts to fail to qualify as an annuity under the Code. Applicant 
states that the likelihood of this exception arising is extremely 
remote. In such a situation, Applicant states that it must be permitted 
to deviate from the investment strategy in order to meet the Section 
817(h) diversification requirements and then only to the extent 
necessary to do so. Applicant states that this limited discretion does 
not give rise to the potential conflicts of interest or to the possible 
reciprocal practices between investment companies in a securities 
related business that Section 12(d)(3) is designed to prevent.
    7. Applicant states that the liquidity of the portfolios of the 
Target 10 Series and Target 5 Series is not a concern here since each 
common stock selected will be a component of the Dow, listed on the New 
York Stock Exchange, and among the most actively traded securities in 
the United States. Similarly, the liquidity of the portfolio of the 
Global Target 15 Series is also not a concern here as each common stock 
selected will be a component of the Dow, FT Index, or Hang Seng Index, 
listed on the New York Stock Exchange, London Stock Exchange, or the 
Hong Kong Stock Exchange and among the most actively traded securities 
in their respective countries.
    8. In addition, Applicant states that the effect of a Series' 
purchase of the stock of parents of broker-dealers would be de minimis. 
Applicant states that the common stocks of securities related issuers 
represented in the Dow, FT Index or the Hang Seng Index, as the case 
may be are widely held with active markets and that potential purchases 
by a portfolio would represent an insignificant amount of the 
outstanding common stock and trading volume of any of these issuers. 
Therefore, Applicant argues that it is almost inconceivable that these 
purchases would have any significant effect on the market value of any 
of these securities related issuers.
    9. Another possible conflict of interest which has raised concern 
is where broker-dealers may be influenced to recommend certain 
investment company funds which invest in the stock of the broker-dealer 
or any of its affiliates. Applicant states that because of the large 
market capitalization of the issuers in the Dow, FT Index and Hang Seng 
Index and the small portion of these issuers' common stock and trading 
value that would be purchased by a Series, it is extremely unlikely 
that any advice offered by a broker-dealer to a customer as to which 
investment company to invest in would be influenced by the possibility 
that a portfolio would be invested in the broker-dealer or a parent 
thereof.
    10. Finally, another potential conflict of interest could occur if 
an investment company directed brokerage to an affiliated broker-dealer 
in which the company had invested to enhance the broker-dealer's 
profitability or to assist it during financial difficulty, even though 
the broker-dealer may not offer the best price and execution. To 
preclude this type of conflict, Applicant agrees, as a condition of 
this application that no company whose stock is held by the Target 10 
Series, Target 5 Series, or Global Target 15 Series nor any affiliate 
of such a company, will act as broker or dealer for the Target 10 
Series, Target 5 Series, or Global Target 15 Series in the purchase or 
sale of any security for such Series' portfolio.
    11. Applicant seeks relief not only with respect to the Fund and 
its Series described above, but also with respect to any other existing 
or future open-end investment company or series thereof that is advised 
by First Trust Advisors, or any entity controlled by or under common 
control with First Trust Advisors, and that follows an investment 
strategy that is the same as the investment strategy of the Target 10 
Series, Target 15 Series, or Global Target 15 Series (the ``Future 
Funds''). Applicant represents that any such Future Funds will comply 
with the terms and conditions of the Application, as amended.
    12. Applicant represents that the terms of the relief requested are 
consistent with the relief previously granted in similar applications. 
Applicant states that the terms of the relief requested are consistent 
with the standards set forth in Section 6(c) of the Act.

Applicant's Conditions

    Applicant agrees to the following conditions:
    With respect to the Target 10 Series:

[[Page 31330]]

    (a) The common stock is included in the Dow as of the applicable 
Stock Selection Date;
    (b) The common stock represents one of the ten companies in the Dow 
that have the highest dividend yields as of the applicable Stock 
Selection Date;
    (c) As of the close of business on the business day following the 
applicable Stock Section Date, the value of the common stock of each 
securities related issuer represents approximately 10% of the value of 
such Series' total assets, but in no event more than 10.5% of the value 
of such Series' total assets;
    2. With respect to the Target 5 Series:
    (a) The common stock is included in the Dow as of the applicable 
Stock Selection Date;
    (b) The common stock represents one of the five companies with the 
lowest dollar per share stock price of the ten companies in the Dow 
that have the highest dividend yields as of the applicable Stock 
Selection Date;
    (c) As of the close of business on the business day following the 
applicable Stock Section Date, the value of the common stock of each 
securities related issuer represents approximately 20% of the value of 
such Series' total assets, but in no event more than 20.5% of the value 
of such Series' total assets;
    3. With respect to the Global Target 15 Series:
    (a) The common stock is included in the Dow, the Hang Seng Index, 
or the FT Index as of the applicable Stock Selection Date;
    (b) The common stock represents one of the five companies with the 
lowest per share stock price of the ten companies on each of the Dow, 
the FT Index, and the Hang Seng Index, respectively, that have the 
highest dividend yield as of the applicable Stock Selection Date;
    (c) As of the close of business on the business day following the 
applicable Stock Selection Date, the value of the common stock of each 
securities related issuer represents approximately 6.7% of the value of 
such Series' total assets, but in no event more than 7.5% of the value 
of such Series' total assets; and
    4. No company whose stock is held by the Target 10 Series, Target 5 
Series, or Global Target 15 Series, or any affiliate thereof, will act 
as a broker or dealer for any Target 10 Series, and Target 5 Series, or 
any Global Target 15 Series in the purchase or sale of any security for 
such Series' portfolio.

Conclusion

    For the reasons summarized above, Applicant asserts that the order 
requested is 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.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-14757 Filed 6-9-99; 8:45 am]
BILLING CODE 8010-01-M