60840 Federal Register / Vol. 75, No. 190 / Friday, October 1, 2010 / Notices 

itself out to the public as employing the 

manager of managers structure 

described in the application. The 

prospectus will prominently disclose 

that the Advisor has ultimate 

responsibility (subject to oversight by 

the Board) to oversee the Sub-Advisors 

and recommend their hiring, 

termination, and replacement. 

3. Within 90 days of the hiring of a 

new Sub-Advisor, the Fund’s 

shareholders will be furnished all 

information about the new Sub-Advisor 

that would be included in a proxy 

statement, except as modified by the 

order to permit Aggregate Fee 

Disclosure. This information will 

include Aggregate Fee Disclosure and 

any change in such disclosure caused by 

the addition of the new Sub-Advisor. To 

meet this obligation, the Fund will 

provide shareholders, within 90 days of 

the hiring of a new Sub-Advisor, with 

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 Advisor will not enter into an 

Investment Subadvisory Agreement 

with any Affiliated Sub-Advisor without 

that agreement, including the 

compensation to be paid thereunder, 

being approved by Fund shareholders. 

5. At all times, at least a majority of 

the Board will be Independent 

Directors, and the nomination of new or 

additional Independent Directors will 

be placed within the discretion of the 

then existing Independent Directors. 

6. When a Sub-Advisor change is 

proposed for the Fund with an 

Affiliated Sub-Advisor, the Board, 

including a majority of the Independent 

Directors, will make a separate finding, 

reflected in the applicable Board 

minutes, that such change is in the best 

interests of the Fund and its 

shareholders, and does not involve a 

conflict of interest from which the 

Advisor or the Affiliated Sub-Advisor 

derives an inappropriate advantage. 

7. Independent legal counsel, as 

defined in rule 0–1(a)(6) under the Act, 

will be engaged to represent the 

Independent Directors. The selection of 

such counsel will be within the 

discretion of the then existing 

Independent Directors. 

8. Whenever a Sub-Advisor is hired or 

terminated, the Advisor will provide the 

Board with information showing the 

expected impact on the profitability of 

the Advisor. 

9. The Advisor will provide general 

management services to the Fund, 

including overall supervisory 

responsibility for the general 

management and investment of the 

Fund’s assets and, subject to review and 

approval of the Board, will: (i) Set the 

Fund’s overall investment strategies, (ii) 

evaluate, select and recommend SubAdvisors to manage all or a part of the 

Fund’s assets, (iii) when appropriate, 

allocate and reallocate the Fund’s assets 

among multiple Sub-Advisors, (iv) 

monitor and evaluate the performance 

of Sub-Advisors, and (v) implement 

procedures reasonably designed to 

ensure that the Sub-Advisors comply 

with the Fund’s investment objective, 

policies and restrictions. 

10. No director or officer of the Fund, 

or director or officer of the Advisor, will 

own directly or indirectly (other than 

through a pooled investment vehicle 

that is not controlled by such person) 

any interest in a Sub-Advisor, except for 

(a) ownership of interests in the Advisor 

or any entity that controls, is controlled 

by, or is under common control with the 

Advisor, or (b) ownership of less than 

1% of the outstanding securities of any 

class of equity or debt of a publicly 

traded company that is either a SubAdvisor or an entity that controls, is 

controlled by or is under common 

control with a Sub-Advisor. 

11. The 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 Advisor will provide the 

Board, no less frequently than quarterly, 

with information about the profitability 

of the Advisor with respect to the Fund. 

The information will reflect the impact 

on profitability of the hiring or 

termination of any Sub-Advisor during 

the applicable quarter. 

For the Commission, by the Division of 

Investment Management, under delegated 

authority. 

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–24655 Filed 9–30–10; 8:45 am] 

BILLING CODE 8010–01–P 

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. 

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 


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1Applicants 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 SubAdviser (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 SubAdviser. 

2The 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. 

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. 

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 SubAdviser 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 SubAdviser 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. 

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 SubAdvisory Agreements without obtaining 

shareholder approval. The requested 

relief will not extend to any SubAdviser 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 SubAdviser to one or more of the 

Subadvised Funds (‘‘Affiliated SubAdviser’’). 

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 SubAdvisory 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 SubAdvisers. 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 SubAdvisers 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 multimanager 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 SubAdviser. 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 thenexisting 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 SubAdvisers 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 SubAdvisers 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 SubAdviser 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 SubAdviser 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 SubAdvisory 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 


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