

[Federal Register: December 22, 2006 (Volume 71, Number 246)]
[Notices]               
[Page 77075-77078]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22de06-126]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27602; 812-13278]

 
NexBank Securities, Inc. and NexBank Series, Notice of 
Application

DATES: December 18, 2006.
AGENCY: Securities and Exchange Commission (SEC).

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: NexBank Securities, Inc. (the 
``Depositor''), and NexBank (the ``Trust''), on behalf of itself and 
any existing and future series, and any future registered unit 
investment trust (``UIT'') sponsored by the Depositor (or an entity 
controlling, controlled by or under common control with the Depositor) 
and their respective series (the future UITs, together with the Trust, 
are collectively the ``Trusts,'' the series of the Trusts are the 
``Series,'' and the Trusts together with the Depositor are 
collectively, the ``Applicants''), request an order to permit each 
Series to acquire shares of registered investment companies or series 
thereof (the ``Funds'') both within and outside the same group of 
investment companies.
    Applicants: The Depositor and the Trust.
    Filing Dates: The application was filed on April 17, 2006 and 
amended on September 5, 2006 and on December 11, 2006.

[[Page 77076]]

    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 January 12, 2007 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, U.S. Securities and Exchange Commission, 100 F 
Street, NE, Washington, DC 20549-10901; Applicants, 13455 Noel Road, 
Suite 2240, Dallas, Texas 75240.

FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Senior Counsel, at 
(202) 551-6876, or Nadya Roytblat, Assistant Director at (202) 551-6821 
(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 
Public Reference Desk, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington DC 20549-0102, tel: (202) 551-5850.

Applicants' Representations

    1. The Trust is a UIT registered under the Act. Each Series will be 
a series of a Trust and will offer units for sale to the public 
(``Units'').\1\ Each Series will be created pursuant to a trust 
agreement which will incorporate by reference a master trust agreement 
between the Depositor and a financial institution that satisfies the 
criteria in section 26(a) of the Act (the ``Trustee''). The Depositor 
is a broker dealer registered under the Securities Exchange Act of 1934 
and member of the National Association of Securities Dealers, Inc. 
(``NASD'').
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    \1\ All existing 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 Series to invest in (a) 
registered investment companies or series thereof 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 Series (``Affiliated Funds''), 
and (b) registered investment companies or series thereof that are not 
part of the same group of investment companies as the Series 
(``Unaffiliated Funds,'' and together with the Affiliated Funds, the 
``Funds''). An Unaffiliated Fund that is a UIT is referred to as an 
``Unaffiliated Underlying Trust.'' An Unaffiliated Fund that is a 
closed-end or open-end management investment company is referred to as 
an ``Unaffiliated Underlying Fund''. Certain of the 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 (``ETFs''). Shares of closed-end Funds and ETFs will 
be deposited in a Series at prices which are based on the market value 
of the securities, as determined by an evaluator. The Depositor will 
not have discretion as to when portfolio securities of a Series will be 
sold, except that the Depositor is authorized to sell securities in 
extremely limited circumstances described in the Series' prospectus. 
Applicants state that the Depositor does not currently intend to 
maintain a secondary market for Units of each Series, but may seek to 
do so in the future. Other broker-dealers may or may not maintain a 
secondary market for Units of a Series.
    3. Applicants state that the requested relief will benefit the 
holders of Units of a Series by providing investors with a 
professionally selected, diversified portfolio of registered investment 
company shares through a single investment vehicle.

Applicants' Legal Analysis

A. Section 12(d)(1) of the Act

    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 (i) more than 3% of the total outstanding voting 
stock of the acquired company (ii) more than 5% of the total assets of 
the acquiring company, or (iii) 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, its principal underwriter, and 
any broker or dealer from selling shares of the investment company to 
another investment company if the sale will cause (i) the acquiring 
company to own more than 3% of the acquired company's voting stock, or 
(ii) more than 10% of the acquired company's voting stock to be owned 
by investment companies. 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 and other securities 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 its 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 concern about undue control does not 
arise with respect to a Series' investment in Affiliated Funds, as 
reflected in section 12(d)(1)(G) of the Act. Applicants also state that 
the proposed arrangement will not result in undue influence by a Series 
or its affiliates over Unaffiliated Funds. Applicants have agreed that 
(a) the Depositor, (b) any person controlling, controlled by or under 
common control with the Depositor, and (c) any investment company and 
any 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

[[Page 77077]]

aggregate) an Unaffiliated Fund within the meaning of section 2(a)(9) 
of the Act. Applicants also note that conditions 2, 3, 5 and 6 set 
forth below will address the concern about undue influence with respect 
to the Unaffiliated Funds.
    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 the Unaffiliated 
Underlying Fund in excess of the limit in section 12(d)(1)(A)(i), the 
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) of the Unaffiliated Underlying Fund, 
understand the terms and conditions of the order and agree to fulfill 
their responsibilities under the order (``Participation Agreement''). 
Applicants note that an Unaffiliated Underlying Fund, including a 
closed-end Fund or an ETF, may choose to reject an investment from the 
Series by declining to execute the Participation Agreement.
    7. Applicants do not believe that the proposed arrangement will 
involve excessive layering of fees. Applicants state 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.\2\ In addition, the Trustee or Depositor will waive fees 
otherwise payable to it by the Series in an amount at least equal to 
any compensation (including fees paid pursuant to any plan adopted by 
an Unaffiliated Underlying Fund under rule 12b-1 under the Act) 
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 the 
Series in the Unaffiliated Fund.
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    \2\ With respect to purchasing closed-end Fund or ETF shares, a 
Series may incur the customary brokerage commissions associated with 
purchasing any equity security on the secondary market.
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    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.\3\
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    \3\ Each Series also will comply with the disclosure 
requirements concerning aggregate costs of investing in the Funds 
set forth in the Investment Company Act Release No. 27399 by the 
compliance date set forth therein.
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B. Section 17(a) of the Act

    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 an Affiliated Fund might be 
deemed to be under the common control of the 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. The sale or redemption by a Fund 
of its shares to or from a Series therefore could be deemed to be a 
principal transaction prohibited by Section 17(a) of the Act.\4\
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    \4\ Applicants acknowledge that receipt of any compensation by 
(a) an affiliated person of a Series, or an affiliated person of 
such person, for the purchase by the Series of shares of a Fund or 
(b) an affiliated person of a Fund, or an affiliated person of such 
person, for the sale by the Fund of its shares to a Series is 
subject to section 17(e) of the Act. The Participation Agreement 
also will include this acknowledgment.
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    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 transactions satisfy the 
standards for relief under sections 17(b) and 6(c) of the Act. 
Applicants state that the terms of the proposed transactions are fair 
and reasonable and do not involve overreaching. Applicants note that 
the consideration paid for the sale and redemption of shares of the 
open-end Funds and Funds that are UITs will be based on the net asset 
values of the Funds. Further, Applicants state that shares of ETFs and 
closed-end Funds will be purchased at market prices.\5\ Finally, 
Applicants state that the proposed transactions will be consistent with 
the policies of each Series and Fund, and with the general purposes of 
the Act.
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    \5\ Applicants note that shares of an ETF would be purchased and 
sold generally through secondary market transactions at market 
prices rather than through principal transactions with the EFT at 
net asset value. Applicants will not rely on the requested relief 
from section 17(a) for such secondary market transactions.
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Applicants' Conditions

    Applicants agree that the requested order will be subject to the 
following conditions:
    1. The members of 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,

[[Page 77078]]

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 fees received pursuant to any plan adopted by an 
Unaffiliated Underlying Fund under rule 12b-1 under the Act) 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 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 a Participation 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 Participation 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.
Nancy M. Morris,
 Secretary.
 [FR Doc. E6-21941 Filed 12-21-06; 8:45 am]

BILLING CODE 8011-01-P
