
[Federal Register: October 1, 2010 (Volume 75, Number 190)]
[Notices]               
[Page 60840-60842]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01oc10-112]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29445; 812-13770]

 
Highland Capital Management, L.P. and Highland Funds I; Notice of 
Application

September 27, 2010.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under section 6(c) of the Investment 
Company Act of 1940 (``Act'') for an exemption from section 15(a) of 
the Act and rule 18f-2 under the Act, as well as from certain 
disclosure requirements.

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Summary of Application: Applicants request an order that would permit 
them to enter into and materially amend subadvisory agreements without 
shareholder approval and would grant relief from certain disclosure 
requirements.

Applicants: Highland Capital Management, L.P. (the ``Adviser'') and 
Highland Funds I (the ``Trust'' and collectively, ``Applicants'').

Filing Dates: The application was filed on May 7, 2010, and amended on 
September 10, 2010, September 24, 2010, and September 27, 2010.

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 October 25, 2010, 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, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-1090. Applicants: The Trust and the 
Adviser, NexBank Tower, 13455 Noel Road, Suite 800, Dallas, TX 75240.

FOR FURTHER INFORMATION CONTACT: Jean E. Minarick, Senior Counsel, at 
(202) 551-6811, or Julia Kim Gilmer, Branch Chief, 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 via the 
Commission's Web site by searching for the file number, or an applicant 
using the Company name box, at http://www.sec.gov/search/search.htm or 
by calling (202) 551-8090.

Applicants' Representations

    1. The Trust, a Delaware statutory trust, is registered under the 
Act as an open-end management investment

[[Page 60841]]

company and currently offers three series (each a ``Series'' and 
together with the Trust, the ``Funds''), each of which has its own 
distinct investment objectives, policies and restrictions.\1\ The 
Adviser is registered as an investment adviser under the Investment 
Advisers Act of 1940 (``Advisers Act'') and serves as the investment 
adviser to each Series pursuant to a separate investment advisory 
agreement (each an ``Investment Advisory Agreement'' and collectively, 
the ``Investment Advisory Agreements'') with each Series. Each 
Investment Advisory Agreement was approved by the Trust's board of 
trustees (the ``Board''), including a majority of the trustees who are 
not ``interested persons,'' as defined in section 2(a)(19) of the Act, 
of the Trust or the Adviser (``Independent Trustees'') and by the 
shareholders of the Series in the manner required by sections 15(a) and 
15(c) of the Act and rule 18f-2 under the Act.
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    \1\ Applicants also request relief with respect to future Series 
and any other existing or future registered open-end management 
investment company or series thereof that: (a) Is advised by the 
Adviser or any entity controlling, controlled by, or under common 
control with the Adviser (collectively, the ``Adviser'') or its 
successors; (b) uses the multi-manager structure described in the 
application; and (c) complies with the terms and conditions of this 
application (together with any Fund that currently uses Sub-Advisers 
(as defined below), each a ``Subadvised Fund'' and collectively, the 
``Subadvised Funds''). The only existing registered open-end 
management investment company that currently intends to rely on the 
requested order is named as an applicant. For purposes of the 
requested order, ``successor'' is limited to an entity or entities 
that result from a reorganization into another jurisdiction or a 
change in the type of business organization. If the name of any 
Subadvised Fund contains the name of a Sub-Adviser (as defined 
below), the name of the Adviser, or a trademark or trade name that 
is owned by the Adviser, will precede the name of the Sub-Adviser.
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    2. Under the terms of the Investment Advisory Agreement, the 
Adviser, subject to the oversight of the Board, furnishes a continuous 
investment program for each Series. The Adviser periodically reviews 
investment policies and strategies of each Series and based on the need 
of a particular Series may recommend changes to the investment policies 
and strategies of the Series for consideration by its Board. For its 
services to each Series, the Adviser receives an investment advisory 
fee from that Series as specified in the applicable Investment Advisory 
Agreement based on the average daily managed assets of that Series. The 
terms of the Investment Advisory Agreement also permit the Adviser, 
subject to the approval of the relevant Board, including a majority of 
the Independent Trustees, and the shareholders of the applicable Series 
(if required by applicable law), to delegate portfolio management 
responsibilities of all or a portion of the Series to one or more 
subadvisers (``Sub-Advisers''). The Adviser has entered into 
subadvisory agreements (``Sub-Advisory Agreements'') with various Sub-
Advisers to provide investment advisory services to various Subadvised 
Funds.\2\ Each Sub-Adviser is, and each future Sub-Adviser will be, an 
investment adviser as defined in section 2(a)(20) of the Act as well as 
registered with the Commission as an ``investment adviser'' under the 
Advisers Act. The Adviser evaluates, allocate assets to and oversees 
the Sub-Advisers, and makes recommendations about their hiring, 
termination and replacement to the relevant Board, at all times subject 
to the authority of the relevant Board. The Adviser will compensate 
each Sub-Adviser out of the fee paid to the Adviser under the 
Investment Advisory Agreement, or the Subadvised Fund will be 
responsible for paying subadvisory fees to the Sub-Adviser.
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    \2\ The Adviser has entered into a Sub-Advisory Agreement with 
JS Asset Management, LLC. The Adviser has also entered into a Sub-
Advisory Agreement with an affiliated Sub-Adviser, Cummings Bay 
Capital Management, L.P. (``Cummings Bay''), to serve as Sub-Adviser 
to the Highland Long/Short Equity Healthcare Fund, a Series of the 
Trust. The requested relief will not extend to Cummings Bay or any 
other Affiliated Sub-Adviser, as defined below.
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    3. Applicants request an order to permit the Adviser, subject to 
Board approval, to select certain Sub-Advisers to manage all or a 
portion of the assets of a Series pursuant to a Sub-Advisory Agreement 
and materially amend Sub-Advisory Agreements without obtaining 
shareholder approval. The requested relief will not extend to any Sub-
Adviser that is an affiliated person, as defined in section 2(a)(3) of 
the Act, of a Subadvised Fund or the Adviser, other than by reason of 
serving as a Sub-Adviser to one or more of the Subadvised Funds 
(``Affiliated Sub-Adviser'').
    4. Applicants also request an order exempting the Subadvised Funds 
from certain disclosure provisions described below that may require the 
Applicants to disclose fees paid by the Adviser or a Subadvised Fund to 
each Sub-Adviser. Applicants seek an order to permit each Subadvised 
Fund to disclose (as a dollar amount and a percentage of each 
Subadvised Fund's net assets) only: (a) The aggregate fees paid to the 
Adviser and any Affiliated Sub-Advisers; and (b) the aggregate fees 
paid to Sub-Advisers other than Affiliated Sub-Advisers (collectively, 
the ``Aggregate Fee Disclosure''). A Subadvised Fund that employs an 
Affiliated Sub-Adviser will provide separate disclosure of any fees 
paid to the Affiliated Sub-Adviser.

Applicants' Legal Analysis

    1. Section 15(a) of the Act provides, in relevant part, that it is 
unlawful for any person to act as an investment adviser to a registered 
investment company except pursuant to a written contract that has been 
approved by the vote of a majority of the company's outstanding voting 
securities. Rule 18f-2 under the Act provides that each series or class 
of stock in a series investment company affected by a matter must 
approve that matter if the Act requires shareholder approval.
    2. Form N-1A is the registration statement used by open-end 
investment companies. Item 19(a)(3) of Form N-1A requires disclosure of 
the method and amount of the investment adviser's compensation.
    3. Rule 20a-1 under the Act requires proxies solicited with respect 
to an investment company to comply with Schedule 14A under the 
Securities Exchange Act of 1934 (``1934 Act''). Items 22(c)(1)(ii), 
22(c)(1)(iii), 22(c)(8) and 22(c)(9) of Schedule 14A, taken together, 
require a proxy statement for a shareholder meeting at which the 
advisory contract will be voted upon to include the ``rate of 
compensation of the investment adviser,'' the ``aggregate amount of the 
investment adviser's fees,'' a description of the ``terms of the 
contract to be acted upon,'' and, if a change in the advisory fee is 
proposed, the existing and proposed fees and the difference between the 
two fees.
    4. Regulation S-X sets forth the requirements for financial 
statements required to be included as part of a registered investment 
company's registration statement and shareholder reports filed with the 
Commission. Sections 6-07(2)(a), (b) and (c) of Regulation S-X require 
a registered investment company to include in its financial statement 
information about the investment advisory fees.
    5. Section 6(c) 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 provisions of the Act, or 
from any rule thereunder, 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. Applicants state that the requested relief meets this standard for 
the reasons discussed below.
    6. Applicants assert that the shareholders expect the Adviser, 
subject

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to the review and approval of the Board, to select the Sub-Advisers who 
are best suited to achieve the Subadvised Fund's investment objective. 
Applicants assert that, from the perspective of the shareholder, the 
role of the Sub-Adviser is substantially equivalent to the role of the 
individual portfolio managers employed by an investment adviser to a 
traditional investment company. Applicants state that requiring 
shareholder approval of each Subadvisory Agreement would impose 
unnecessary delays and expenses on the Subadvised Funds, and enable the 
Subadvised Fund to act more quickly when the Board and the Adviser 
believe that a change would benefit a Subadvised Fund and its 
shareholders. Applicants note that the Investment Advisory Agreement 
and any Sub-Advisory Agreement with an Affiliated Sub-Adviser (if any) 
will continue to be subject to the shareholder approval requirements of 
section 15(a) of the Act and rule 18f-2 under the Act.
    7. Applicants assert that the requested disclosure relief would 
benefit shareholders of the Subadvised Funds because it would improve 
the Adviser's ability to negotiate the fees paid to Sub-Advisers. 
Applicants state that the Adviser may be able to negotiate rates that 
are below a Sub-Adviser's ``posted'' amounts, if the Adviser is not 
required to disclose the Sub-Advisers' fees to the public. Applicants 
submit that the requested relief will encourage Sub-Advisers to 
negotiate lower subadvisory fees with the Adviser if the lower fees are 
not required to be made public.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Before a Subadvised Fund may rely on the order requested herein, 
the operation of the Subadvised Fund in the manner described in this 
application will be approved by a majority of the Subadvised Fund's 
outstanding voting securities as defined in the Act or, in the case of 
a Subadvised Fund whose public shareholders purchase shares on the 
basis of a prospectus containing the disclosure contemplated by 
condition 2 below, by the initial shareholder before such Subadvised 
Fund's shares are offered to the public.
    2. The prospectus for each Subadvised Fund will disclose the 
existence, substance, and effect of any order granted pursuant to the 
application. In addition, each Subadvised Fund will hold itself out to 
the public as employing a multi-manager structure as described in the 
application. The prospectus will prominently disclose that the Adviser 
has the ultimate responsibility, subject to oversight by the Board, to 
oversee the Sub-Advisers and recommend their hiring, termination, and 
replacement.
    3. Within 90 days of the hiring of a new Sub-Adviser, shareholders 
of the relevant Subadvised Fund will be furnished all information about 
the new Sub-Adviser that would be included in a proxy statement, except 
as modified to permit Aggregate Fee Disclosure. This information will 
include Aggregate Fee Disclosure and any change in disclosure caused by 
the addition of the new Sub-Adviser. To meet this obligation, each 
Subadvised Fund will provide its shareholders, within 90 days of the 
hiring of a new Sub-Adviser, an information statement meeting the 
requirements of Regulation 14C, Schedule 14C and Item 22 of Schedule 
14A under the 1934 Act, except as modified by the order to permit 
Aggregate Fee Disclosure.
    4. The Adviser will not enter into a Sub-Advisory Agreement with 
any Affiliated Sub-Adviser without that agreement, including the 
compensation to be paid thereunder, being approved by the shareholders 
of the applicable Subadvised Fund.
    5. At all times, at least a majority of the Board will be 
Independent Trustees, and the nomination of new or additional 
Independent Trustees will be placed within the discretion of the then-
existing Independent Trustees.
    6. Independent legal counsel, as defined in rule 0-1(a)(6) under 
the Act, will be engaged to represent the Independent Trustees. The 
selection of such counsel will be within the discretion of the then-
existing Independent Trustees.
    7. Whenever a Sub-Adviser change is proposed for a Subadvised Fund 
with an Affiliated Sub-Adviser, the Board, including a majority of the 
Independent Trustees, will make a separate finding, reflected in the 
Board minutes, that the change is in the best interests of the 
Subadvised Fund and its shareholders, and does not involve a conflict 
of interest from which the Adviser or the Affiliated Sub-Adviser 
derives an inappropriate advantage.
    8. Whenever a Sub-Adviser is hired or terminated, the Adviser will 
provide the Board with information showing the expected impact on the 
profitability of the Adviser.
    9. The Adviser will provide general management services to each 
Subadvised Fund, including overall supervisory responsibility for the 
general management and investment of the Subadvised Fund's assets and, 
subject to review and approval of the Board, will: (a) Set the 
Subadvised Fund's overall investment strategies; (b) evaluate, select 
and recommend Sub-Advisers to manage all or a portion of the Subadvised 
Fund's assets; (c) allocate and, when appropriate, reallocate the 
Subadvised Fund's assets among Sub-Advisers; (d) monitor and evaluate 
the Sub-Advisers' performance; and (e) implement procedures reasonably 
designed to ensure that Sub-Advisers comply with the Subadvised Fund's 
investment objective, policies and restrictions.
    10. No trustee or officer of a Subadvised Fund or director or 
officer of the Adviser, will own directly or indirectly (other than 
through a pooled investment vehicle that is not controlled by such 
person), any interest in a Sub-Adviser except for (a) ownership of 
interests in the Adviser or any entity that controls, is controlled by 
or is under common control with the Adviser; or (b) ownership of less 
than 1% of the outstanding securities of any class of equity or debt of 
any publicly traded company that is either a Sub-Adviser or an entity 
that controls, is controlled by or is under common control with a Sub-
Adviser.
    11. Each Subadvised Fund will disclose in its registration 
statement the Aggregate Fee Disclosure.
    12. In the event the Commission adopts a rule under the Act 
providing substantially similar relief to that in the order requested 
in the application, the requested order will expire on the effective 
date of that rule.
    13. The Adviser will provide the Board, no less frequently than 
quarterly, with information about the profitability of the Adviser on a 
per Subadvised Fund basis. The information will reflect the impact on 
profitability of the hiring or termination of any Sub-Adviser during 
the applicable quarter.
    14. For Subadvised Funds that pay fees to a Sub-Adviser directly 
from Fund assets, any changes to a Sub-Advisory Agreement that would 
result in an increase in the total management and advisory fees payable 
by a Subadvised Fund will be required to be approved by the 
shareholders of the Subadvised Fund.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-24722 Filed 9-30-10; 8:45 am]
BILLING CODE 8010-01-P

