[Federal Register Volume 69, Number 156 (Friday, August 13, 2004)]
[Notices]
[Pages 50227-50230]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18532]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 26529; 812-13108]


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

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

ACTION: Notice of an application under (a) section 6(c) of the 
Investment Company Act of 1940 (``Act'') for an exemption from sections 
2(a)(32), 2(a)(35), 14(a), 19(b), 22(d) and 26(a)(2)(C) of the Act and 
rules 19b-1 and rule 22c-1 thereunder; and (b) sections 11(a) and 11(c) 
of the Act for approval of certain exchange and rollover privileges.

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APPLICANTS: Fixed Income Securities, L.P. (``FIS'') and any entity 
controlling, controlled by or under common control with FIS (each, a 
``Depositor''); Advisor's Disciplined Trust (``ADT''); any future 
registered unit investment trusts sponsored by the Depositor (together 
with ADT, the ``Trusts'') and the future and existing series of each 
Trust (each a ``Series'').\1\
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    \1\ Any future Series that relies on the requested order will 
comply with the terms and conditions of the application.

SUMMARY OF APPLICATION: Applicants request an order to permit certain 
unit investment trusts (``UITs'') to: (a) Impose sales charges on a 
deferred basis and waive the deferred sales charge in certain cases; 
(b) offer unitholders certain exchange and rollover options; (c) 
publicly offer units without requiring the Depositor to take for its 
own account or place with others $100,000 worth of units; and (d) 
distribute capital gains resulting from the sale of portfolio 
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securities within a reasonable time after receipt.

FILING DATES: The application was filed on July 15, 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 the 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, CO 80132.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel, at 
(202) 942-0634 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 (telephone (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.\2\ FIS, a Texas limited partnership, is registered under the 
Securities Exchange Act of 1934 as a broker-dealer and is the depositor 
of each Series. Each Series will be created by a trust indenture 
between the Depositor and a banking institution or trust company as 
trustee (``Trustee'').
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    \2\ All presently existing Trusts that currently intend to rely 
on the requested order have been named as applicants.
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    2. The Depositor acquires a portfolio of securities, which it 
deposits with the Trustee in exchange for certificates representing 
units of fractional undivided interest in the Series' portfolio 
(``Units''). The Units are offered to the public by the Depositor and 
dealers at a price which, during the initial offering period, is based 
upon the aggregate market value of the underlying securities plus a 
front-end sales charge. The Depositor may reduce the sales charge in 
compliance with rule 22d-1 under the Act in certain circumstances, 
which are disclosed in the prospectus.
    3. The Depositor will maintain a secondary market for Units and

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continually offer to purchase these Units at prices based upon the 
market value of the underlying securities. Investors may purchase Units 
on the secondary market at the current public offering price plus a 
front-end sales charge. If the Depositor discontinues maintaining such 
a market at any time for any Series, holders of the Units 
(``Unitholders'') of that Series may redeem their Units through the 
Trustee.

A. Deferred Sales Charge and Waiver of Deferred Sales Charge Under 
Certain Circumstances

    1. Applicants request an order to the extent necessary to permit 
one or more Series to impose a sales charge on a deferred basis 
(``deferred sales charge'' or ``DSC''). For each Series, the Depositor 
would set a maximum sales charge per Unit, a portion of which may be 
collected ``up front'' (i.e., at the time an investor purchases the 
Units). The DSC would be collected subsequently in installments 
(``Installment Payments'') as described in the application. The 
Depositor would not add any amount for interest or any similar or 
related charge to adjust for such deferral.
    2. When a Unitholder redeems or sells Units, the Depositor intends 
to deduct any unpaid DSC from the redemption or sale proceeds. When 
calculating the amount due, the Depositor will assume that Units on 
which the DSC has been paid in full are redeemed or sold first. With 
respect to Units on which the DSC has not been paid in full, the 
Depositor will assume that the Units held for the longest time are 
redeemed or sold first. Applicants represent that the DSC collected at 
the time of redemption or sale, together with the Installment Payments 
and any amount collected up front, will not exceed the maximum sales 
charge per Unit. Under certain circumstances, the Depositor may waive 
the collection of any unpaid DSC in connection with redemptions or 
sales of Units. These circumstances will be disclosed in the prospectus 
for the relevant Series and implemented in accordance with rule 22d-1 
under the Act.
    3. Each Series offering Units subject to a DSC will state the 
maximum charge per Unit in its prospectus. In addition, the prospectus 
for such Series will include the table required by Form N-1A (modified 
as appropriate to reflect the difference between UITs and open-end 
management investment companies) and a schedule setting forth the 
number and date of each Installment Payment, along with the duration of 
the collection period. The prospectus also will disclose that portfolio 
securities may be sold to pay an Installment Payment if distribution 
income is insufficient, and that securities will be sold pro rata or a 
specific security will be designated for sale.

B. Exchange Option and Rollover Option

    1. Applicants request an order to the extent necessary to permit 
Unitholders of a Series to exchange their Units for Units of another 
Series (``Exchange Option'') and Unitholders of a Series that is 
terminating to exchange their Units for Units of a new Series of the 
same type (``Rollover Option''). The Exchange Option and Rollover 
Option would apply to all exchanges of Units sold with a front-end 
sales charge or DSC.
    2. A Unitholder who purchases Units under the Exchange Option or 
Rollover Option would pay a lower sales charge than that which would be 
paid for the Units by a new investor. The reduced sales charge will be 
reasonably related to the expenses incurred in connection with the 
administration of the DSC program, which may include an amount that 
will fairly and adequately compensate the Depositor and participating 
underwriters and brokers for their services in providing the DSC 
program.
    3. Pursuant to the Exchange Option, an adjustment would 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 (``Five 
Months Adjustment''). An adjustment also would be made if Units on 
which a DSC is collected are exchanged for Units of a Series that 
imposes a front-end sales charge and the exchange occurs before the DSC 
collected (plus any amount collected up front on the exchanged Units) 
at least equals the per Unit sales charge on the acquired Units (``DSC 
Front-End Exchange Adjustment''). If an exchange involves either the 
Five Months Adjustment or the DSC Front-End Exchange Adjustment, the 
Unitholder would pay the greater of the reduced sales charge or an 
amount which, together with the sales charge already paid on the 
exchanged Units, equals the normal sales charge on the acquired Units 
on the date of the exchange. With appropriate disclosures, the 
Depositor may waive such payment. Further, the Depositor would reserve 
the right to vary the sales charge normally applicable to a Series and 
the charge applicable to exchanges, as well as to modify, suspend, or 
terminate the Exchange Option as set forth in the conditions to the 
application.

Applicants' Legal Analysis

A. DSC and Waiver of DSC

    1. Section 4(2) of the Act defines a ``unit investment trust'' as 
an investment company that issues only redeemable securities. Section 
2(a)(32) of the Act 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. Rule 22c-1 
under the Act requires that the price of a redeemable security issued 
by a registered investment company for purposes of sale, redemption or 
repurchase be based on the security's current net asset value 
(``NAV''). Because the collection of any unpaid DSC may cause a 
redeeming Unitholder to receive an amount less than the NAV of the 
redeemed Units, applicants request relief from section 2(a)(32) and 
rule 22c-1.
    2. Section 22(d) of the Act and rule 22d-1 under the Act require a 
registered investment company and its principal underwriter and dealers 
to sell securities only at the current public offering price described 
in the investment company's prospectus, with the exception of sales of 
redeemable securities at prices that reflect scheduled variations in 
the sales load. Section 2(a)(35) of the Act defines the term ``sales 
load'' as the difference between the sales price and the portion of the 
proceeds invested by the depositor or trustee. Applicants request 
relief from section 2(a)(35) and section 22(d) to permit waivers, 
deferrals or other scheduled variations of the sales load.
    3. Under section 6(c) of the Act, the Commission may exempt classes 
of transactions, if and 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. Applicants state that their proposal meets 
the standards of section 6(c). Applicants state that the provisions of 
section 22(d) are intended to prevent (a) riskless trading in 
investment company securities due to backward pricing, (b) disruption 
of orderly distribution by dealers selling shares at a discount, and 
(c) discrimination among investors resulting from different prices 
charged to different investors. Applicants assert that the proposed DSC 
program will present none of these abuses. Applicants further state 
that all scheduled variations in the sales load will be disclosed in 
the prospectus of

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each Series and applied uniformly to all investors, and that applicants 
will comply with all the conditions set forth in rule 22d-1.
    4. Section 26(a)(2)(C) of the Act, in relevant part, prohibits a 
trustee or custodian of a UIT from collecting from the trust as an 
expense any payment to the trust's depositor or principal underwriter. 
Because the Trustee's payment of the DSC to the Depositor may be deemed 
to be an expense under section 26(a)(2)(C), applicants request relief 
under section 6(c) from section 26(a)(2)(C) to the extent necessary to 
permit the Trustee to collect Installment Payments and disburse them to 
the Depositor. Applicants submit that the relief is appropriate because 
the DSC is more properly characterized as a sales load.

B. Exchange Option and Rollover Option

    1. Section 11(a) and (c) of the Act prohibit any offer of exchange 
by a UIT for the securities of another investment company unless the 
terms of the offer have been approved in advance by the Commission. 
Applicants request an order under sections 11(a) and 11(c) for 
Commission approval of the Exchange Option and the Rollover Option. 
Applicants state that the Five Months Adjustment and the DSC Front-End 
Exchange Adjustment in certain circumstances are appropriate to 
maintain the equitable treatment of various investors in each Series.

C. Net Worth Requirement

    1. Section 14(a) of the Act requires that a registered investment 
company have $100,000 of net worth prior to making a public offering. 
Applicants state that each Series will comply with this requirement 
because the Depositor will deposit substantially more than $100,000 of 
debt and/or equity securities, depending on the objective of the 
particular Series. Applicants assert, however, that the Commission has 
interpreted section 14(a) as requiring that the initial capital 
investment in an investment company be made without any intention to 
dispose of the investment. Applicants state that, under this 
interpretation, a Series would not satisfy section 14(a) because of the 
Depositor's intention to sell all the Units of the Series.
    2. Rule 14a-3 under the Act exempts UITs from section 14(a) if 
certain conditions are met, one of which is that the UIT invest only in 
``eligible trust securities,'' as defined in the rule. Applicants state 
that they may not rely on rule 14a-3 because certain future Series 
(collectively, ``Equity Series'') will invest all or a portion of their 
assets in equity securities or registered investment company securities 
pursuant to an exemptive order, which do not satisfy the definition of 
eligible trust securities.
    3. Applicants request an exemption under section 6(c) of the Act to 
the extent necessary to exempt the Equity Series from the net worth 
requirement in section 14(a). Applicants state that the Series and the 
Depositor will comply in all respects with the requirements of rule 
14a-3, except that the Equity Series will not restrict their portfolio 
investments to ``eligible trust securities.''

D. Capital Gains Distribution

    1. Section 19(b) of the Act and rule 19b-1 under the Act provide 
that, except under limited circumstances, no registered investment 
company may distribute long-term gains more than once every twelve 
months. Rule 19b-1(c), under certain circumstances, exempts a UIT 
investing in eligible trust securities (as defined in rule 14a-3) from 
the requirements of rule 19b-1. Because the Equity Series do not limit 
their investments to eligible trust securities, however, the Equity 
Series will not qualify for the exemption in paragraph (c) of rule 19b-
1. Applicants therefore request an exemption under section 6(c) from 
section 19(b) and rule 19b-1 to the extent necessary to permit capital 
gains earned in connection with the sale of portfolio securities to be 
distributed to Unitholders along with the Equity Series' regular 
distributions. In all other respects, applicants will comply with 
section 19(b) and rule 19b-1.
    2. Applicants state that their proposal meets the standards of 
section 6(c). Applicants assert that any sale of portfolio securities 
would be triggered by the need to meet Series' expenses, Installment 
Payments, or by redemption requests, events over which the Depositor 
and the Equity Series do not have control. Applicants further state 
that, because principal distributions must be clearly indicated in 
accompanying reports to Unitholders as a return of principal and will 
be relatively small in comparison to normal dividend distributions, 
there is little danger of confusion from failure to differentiate among 
distributions.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:

A. DSC and Exchange and Rollover Options

    1. Whenever the Exchange Option or the Rollover 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 prominent 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 the Rollover 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 Series under section 22(e) of the Act and the rules and 
regulations promulgated thereunder, or (ii) a Series 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 or the 
Rollover Option will pay a lower sales charge than that which would be 
paid for the Units by a new investor.
    3. The prospectus of each Series offering exchanges or rollovers 
and any sales literature or advertising that mentions the existence of 
the Exchange Option or Rollover Option will disclose that the Exchange 
Option and the Rollover Option are subject to modification, termination 
or suspension without notice, except in certain limited cases.
    4. Any DSC imposed on a Series' Units will comply with the 
requirements of subparagraphs (1), (2) and (3) of rule 6c-10(a) under 
the Act.
    5. Each Series offering Units subject to a DSC will include in its 
prospectus the disclosure required in Form N-1A relating to deferred 
sales charges (modified as appropriate to reflect the differences 
between UITs and open-end management investment companies) and a 
schedule setting forth the number and date of each Installment Payment.

B. Net Worth Requirement

    1. Applicants will comply in all respects with the requirements of 
rule 14a-3, except that the Equity Series will not restrict their 
portfolio investments to ``eligible trust securities.''


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    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-18532 Filed 8-12-04; 8:45 am]
BILLING CODE 8010-01-P