[Federal Register Volume 69, Number 156 (Friday, August 13, 2004)]
[Notices]
[Pages 50224-50227]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18531]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 26528 ; 812-13107]


Fixed Income Securities, L.P., et al.; Notice of Application

August 9, 2004.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under section 12(d)(1)(J) of 
the Investment Company Act of 1940 (``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: Fixed Income Securities, L.P. 
(``FIS''), Advisor's Disciplined Trust (``ADT''), and any registered 
unit investment trusts (``UITs'') organized in the future and sponsored 
by FIS, or an entity controlling, controlled by or under common control 
with FIS (each, a ``Depositor''), and their respective series (together 
with the ADT, the ``Trusts'', and each series of the Trusts, a 
``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: FIS and ADT.
    Filing Dates: The application was filed on July 14, 2004, and 
amended on August 5, 2004. Applicants have agreed to file an amendment 
during the notice period, the substance of which is reflected in this 
notice.
    Hearing or Notification of Hearing: An order granting the 
application 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 September 2, 2004, 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 Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC 
20549-0609. Applicants, 18925 Base Camp Road, Monument, Colorado 80132.

FOR FURTHER INFORMATION CONTACT: Bruce MacNeil, Senior Counsel, at 
(202) 942-0634, or Annette Capretta, Branch Chief, at (202) 942-0564 
(Office of Investment Company Regulation, Division of Investment 
Management).

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, (202) 942-8090.

Applicants' Representations

    1. ADT is a UIT registered under the Act. Each Series will be a 
series of a Trust, each a UIT which is or will be registered under the 
Act. FIS, a Texas limited partnership, is registered under the 
Securities Exchange Act of 1934 as a broker-dealer.
    2. Applicants request relief to permit the 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 the 
Affiliated Funds, the ``Funds''). The Unaffiliated Funds may include 
UITs (``Unaffiliated Underlying Trusts'') and

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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 the 
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 Series will 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 seek an exemption under section 
12(d)(1)(J) to permit a Series to acquire shares of a Fund and to 
permit a Fund to sell shares to a 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 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 Series or its affiliates over Funds. To limit 
the control that a Series may have over an Unaffiliated Fund, 
applicants propose a condition prohibiting the Depositor, the 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 limit further the potential for undue influence over 
Unaffiliated Funds, applicants propose conditions 2 through 6, stated 
below, to preclude a 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 implications of an investment by a Series under the 
requested order, prior to a Series' investment in an Unaffiliated 
Underlying Fund in excess of the limit in Section 12(d)(1)(A)(i), the 
Series and Unaffiliated Underlying Fund will execute an agreement 
stating, without limitation, that the Depositor and Trustee and the 
board of directors or trustees to the Unaffiliated Underlying Fund and 
the investment adviser(s) 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 Fund may choose to reject an investment from the Series.
    7. Applicants do not believe that the proposed arrangement will 
involve 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 
NASD, Inc. (``NASD Conduct Rules'')) charged with respect to Units of a 
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 Series (``Trustee'') or Depositor will waive fees otherwise 
payable by the 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 (``12b-1 Fees'')) 
received from an Unaffiliated Fund by the Trustee or Depositor, or an 
affiliated person of the Trustee or Depositor, other than any advisory 
fees paid to the Trustee or Depositor or its affiliated person by an 
Unaffiliated Underlying Fund, in connection with the investment by a 
Series in the Unaffiliated Fund.
    8. Applicants state 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 or 
company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of 
the limits contained in section 12(d)(1)(A). Applicants also represent 
that a 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 Series and Affiliated Funds might be 
deemed to be under the common control of the

[[Page 50226]]

Depositor or an entity controlling, controlled by, or under common 
control with the Depositor. Applicants also state that a Series and a 
Fund might become affiliated persons if the 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 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 17(b) and 6(c) 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 Series and Fund, and with the general purposes of the Act.

Applicants' Conditions

    Applicants agree that the requested order will be subject to the 
following conditions:
    1. (a) The Depositor, (b) any person controlling, controlled by, or 
under common control with the Depositor, and (c) any investment company 
or issuer that would be an investment company but for section 3(c)(1) 
or 3(c)(7) of the Act sponsored or advised by the Depositor, or any 
person controlling, controlled by, or under common control with the 
Depositor (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 of the 
Unaffiliated Fund in the same proportion as the vote of all other 
holders of the Unaffiliated Fund's shares.
    2. No Series or its Depositor, promoter, principal underwriter, or 
any person controlling, controlled by, or under common control with any 
of those entities (each, a ``Series Affiliate'') will cause any 
existing or potential investment by the Series in an Unaffiliated Fund 
to influence the terms of any services or transactions between the 
Series or Series Affiliate and the Unaffiliated Fund or its investment 
adviser(s), sponsor, promoter, principal underwriter, or any person 
controlling, controlled by, or under common control with any of those 
entities.
    3. Once an investment by a Series in the securities of an 
Unaffiliated Underlying Fund exceeds the limit in section 
12(d)(1)(A)(i) of the Act, the board of directors or trustees of the 
Unaffiliated Underlying Fund, including a majority of the disinterested 
board members, will determine that any consideration paid by the 
Unaffiliated Underlying Fund to the Series or Series Affiliate in 
connection with any services or transactions: (a) Is fair and 
reasonable in relation to the nature and quality of the services and 
benefits received by the Unaffiliated Underlying Fund; (b) 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 (c) does not involve 
overreaching on the part of any person concerned. This condition does 
not apply with respect to any services or transactions between an 
Unaffiliated Underlying Fund and its investment adviser(s), or any 
person controlling, controlled by, or under common control with such 
investment adviser(s).
    4. The Trustee or Depositor will waive fees otherwise payable to it 
by the Series in an amount at least equal to any compensation 
(including 12b-1 fees) received from an Unaffiliated Fund by the 
Trustee or Depositor, or an affiliated person of the Trustee or 
Depositor, other than any advisory fees paid to the Trustee or 
Depositor or its affiliated person by an Unaffiliated Underlying Fund, 
in connection with the investment by a Series in the Unaffiliated Fund.
    5. No Series or Series Affiliate (except to the extent it is acting 
in its capacity as an investment adviser to an Unaffiliated Underlying 
Fund or sponsor to an Unaffiliated Underlying Trust) will cause an 
Unaffiliated Fund to purchase a security in an offering of securities 
during the existence of any underwriting or selling syndicate of which 
a principal underwriter is the Depositor or a person of which the 
Depositor is an affiliated person (each, an ``Underwriting Affiliate,'' 
except any person whose relationship to the Unaffiliated Fund is 
covered by section 10(f) of the Act is not an Underwriting Affiliate). 
An offering of securities during the existence of an underwriting or 
selling syndicate of which a principal underwriter is an Underwriting 
Affiliate is an ``Affiliated Underwriting.''
    6. The board of an Unaffiliated Underlying Fund, including a 
majority of the disinterested board members, will adopt procedures 
reasonably designed to monitor any purchases of securities by the 
Unaffiliated Underlying Fund in an Affiliated Underwriting once an 
investment by a Series in the securities of the Unaffiliated Underlying 
Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act, including 
any purchases made directly from an Underwriting Affiliate. The board 
of the Unaffiliated Underlying Fund will review these purchases 
periodically, but no less frequently than annually, to determine 
whether the purchases were influenced by the investment by the Series 
in the Unaffiliated Underlying Fund. The board of the Unaffiliated 
Underlying Fund will consider, among other things: (a) Whether the 
purchases were consistent with the investment objectives and policies 
of the Unaffiliated Underlying Fund; (b) 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 (c) whether the 
amount of securities purchased by the Unaffiliated Underlying Fund in 
Affiliated Underwritings and the amount purchased directly from an 
Underwriting Affiliate have changed significantly from prior years. The 
board of the Unaffiliated Underlying Fund will take any appropriate 
actions based on its review, including, if appropriate, the institution 
of procedures designed to assure that purchases of securities in 
Affiliated Underwritings are in the best interests of shareholders.
    7. An Unaffiliated Underlying Fund will maintain and preserve 
permanently in an easily accessible place a written copy of the 
procedures described in the preceding condition, and any modifications 
to such procedures, and

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will maintain and preserve for a period of not less than six years from 
the end of the fiscal year in which any purchase in an Affiliated 
Underwriting occurred, the first two years in an easily accessible 
place, a written record of each purchase of securities in Affiliated 
Underwritings once an investment by a Series in the securities of the 
Unaffiliated Underlying Fund exceeds the limit 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 
determinations of the board of the Unaffiliated Underlying Fund were 
made.
    8. Before investing in an Unaffiliated Underlying Fund in excess of 
the limit in section 12(d)(1)(A)(i), each Series and the Unaffiliated 
Underlying Fund will execute an agreement stating, without limitation, 
that the Depositor and Trustee and the board of directors or trustees 
of the Unaffiliated Underlying Fund and the investment adviser(s) 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 
Series will notify the Unaffiliated Underlying Fund of the investment. 
At such time, the Series also will transmit to the Unaffiliated 
Underlying Fund a list of the names of each Series Affiliate and 
Underwriting Affiliate. The Series will notify the Unaffiliated 
Underlying Fund of any changes to the list of names as soon as 
reasonably practicable after a change occurs. The Unaffiliated 
Underlying Fund and the Series will maintain and preserve a copy of the 
order, the agreement, and the list with any updated information for the 
duration of the investment, and for a period of not less than six years 
thereafter, the first two years in an easily accessible place.
    9. Any sales charges and/or service fees charged with respect to 
Units of a Series will not exceed the limits applicable to a fund of 
funds as set forth in Rule 2830 of the Conduct Rules of the NASD.
    10. No Fund will acquire securities of any investment company or 
company relying on section 3(c)(1) or 3(c)(7) of the Act 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. 04-18531 Filed 8-12-04; 8:45 am]
BILLING CODE 8010-01-P