[Federal Register Volume 68, Number 229 (Friday, November 28, 2003)]
[Notices]
[Pages 66890-66892]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-29657]


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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