File No. 812-____
Before the
U.S. SECURITIES AND EXCHANGE COMMISSION
-----------------------------------
In the Matter of the Application
of
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND II
120 E. Liberty Drive
Suite 400
Wheaton, IL 60187
APPLICATION FOR
AN ORDER PURSUANT TO SECTION 6(C) OF THE
INVESTMENT COMPANY ACT OF 1940 FOR AN EXEMPTION
FROM SECTIONS 18(a)(1)(A) AND 18(a)(1)(B)
OF THE INVESTMENT COMPANY ACT OF 1940
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May 22, 2009
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Please direct all communications
regarding this Application to: Copies to:
First Trust/Four Corners Senior Floating Rate Felice R. Foundos
Income Fund Suzanne M. Russell
First Trust/Four Corners Senior Floating Rate Chapman and Cutler LLP
Income Fund II 111 West Monroe Street
120 E. Liberty Drive Chicago, IL 60603
Suite 400 Tel: (312) 845-3000
Wheaton, IL 60187 Fax: (312) 701-2361
Attn: W. Scott Jardine, Esq.
This document contains 24 pages (including exhibits),
which have been numbered sequentially.
Page 1 of 24
UNITED STATES OF AMERICA
BEFORE THE U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
)
IN THE MATTER OF )
)
FIRST TRUST/FOUR CORNERS SENIOR )
FLOATING RATE INCOME FUND )
FIRST TRUST/FOUR CORNERS SENIOR ) Application
FLOATING RATE INCOME FUND II ) for an Order Pursuant to Section 6(c)
) of the Investment Company Act of 1940
120 E. Liberty Drive ) for an Exemption from the
Suite 400 ) Provisions of Sections 18(a)(1)(A) and
Wheaton, IL 60187 ) 18(a)(1)(B) of the Investment Company Act
) of 1940
------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund (the "Four Corners
Fund") and First Trust/Four Corners Senior Floating Rate Income Fund II (the
"Four Corners Fund II," and together with the Four Corners Fund, the
"Applicants") hereby apply for an order (the "Order") of the U.S. Securities and
Exchange Commission (the "Commission") pursuant to Section 6(c) of the
Investment Company Act of 1940, as amended (the "1940 Act"), granting an
exemption from Section 18(a)(1)(A) of the 1940 Act to the extent necessary to
permit each Applicant to refinance any auction rate preferred shares ("ARPS";
and holders of ARPS, "ARPS shareholders") issued prior to February 1, 2008 by
issuing or incurring a comparable amount of debt (such issuing or incurring to
be referred to as "borrowing" for purposes of this Application) subject to
"asset coverage" (as defined in Section 18(h) of the 1940 Act) of 200% (rather
than the asset coverage of 300% ordinarily applicable to a senior security
constituting indebtedness under Section 18(a)(1)(A) of the 1940 Act).(1) In
addition, the Applicants request that the Order grant an exemption from Section
18(a)(1)(B) of the 1940 Act so that the Applicants may, in connection with the
borrowings referred to above and to the extent that compliance with Section
18(a)(1)(B) is not excused in the circumstances by Section 18(g) of the 1940
Act, make provision to prohibit the declaration of dividends or distributions
and the purchase of its capital stock (including its ARPS) unless, at the time
of any declaration or purchase, after deducting the amount of such dividend,
distribution or purchase price, it has an asset coverage of at least 200%
(rather than the asset coverage of 300% ordinarily required for such
declarations and purchases under Section 18(a)(1)(B) of the 1940 Act).
_______________________
(1) For the purposes of this Application, "ARPS Refinancings" refer to
borrowings entered into by an Applicant subsequent to February 1, 2008
for the purpose of (i) redeeming ARPS outstanding as of February 1,
2008; or (ii) refinancing borrowings entered into pursuant to (i). The
Applicants may adjust the level of such borrowings down or up in
response to on-going market conditions, consistent with an Applicant's
leverage targets and policies as well as the undertakings of this
Application, provided that in no case may the level of such borrowings
exceed the level existing at the time such borrowings were originally
entered into.
Page 2 of 24
Each Applicant's refinancing of its ARPS would be subject to, among other
factors, such Applicant's being able to successfully increase its current
borrowings by drawing against existing credit facilities or negotiating new
agreements with existing counterparties or other acceptable counterparties,
approval of any necessary changes to the Applicant's fundamental investment
policies and approval of such arrangements, as necessary, by such Applicant's
board of trustees ("Board"), among other actions. The Applicants can provide no
assurance that, if the Commission grants the Order, the Applicants will be able
to refinance their outstanding ARPS using borrowings.
I. THE APPLICANTS
First Trust/Four Corners Senior Floating Rate Income Fund (NYSE Amex: FCM). The
Four Corners Fund was organized on May 13, 2003 as a Delaware statutory trust
and reorganized on August 8, 2003 as a Massachusetts business trust. It is
registered under the 1940 Act as a diversified, closed-end management investment
company. The Four Corners Fund is advised by First Trust Advisors L.P. ("First
Trust") and sub-advised by Four Corners Capital Management, LLC ("Four
Corners"). The primary investment objective of the Four Corners Fund is to seek
a high level of current income. As a secondary objective, it attempts to
preserve capital. The Four Corners Fund pursues these objectives through
investment in a portfolio of senior secured floating rate corporate loans.
First Trust/Four Corners Senior Floating Rate Income Fund II (NYSE: FCT). The
Four Corners Fund II was organized on March 25, 2004 as a Massachusetts business
trust. It is registered under the 1940 Act as a diversified, closed-end
management investment company. The Four Corners Fund II is advised by First
Trust and sub-advised by Four Corners. The primary investment objective of the
Four Corners Fund II is to seek a high level of current income. As a secondary
objective, it attempts to preserve capital. The Four Corners Fund II pursues
these objectives through investment in a portfolio of senior secured floating
rate corporate loans.
THE APPLICANTS' EXISTING ARPS
The Applicants issued their outstanding ARPS for purposes of investment leverage
to augment the amount of investment capital available for use in the pursuit of
their investment objectives. Through the use of leverage, the Applicants,
similar to other closed-end funds, seek to enhance the distributions and
investment return available over time to the holders of their common shares by
earning a rate of portfolio return (which includes the return related to
investments made with the proceeds from leverage) that exceeds the leverage
costs, typically over the long term. Historically, the Applicants have generally
achieved this goal of enhancing common shareholder distributions and returns
through the use of leverage over time, although, more recently, leverage has
detracted from common shareholder returns during the recent period of negative
market returns. Each Applicant has issued and outstanding a class of common
shares. The Four Corners Fund has a class of one, and the Four Corners Fund II
has a class of two, series of ARPS.
Page 3 of 24
The ARPS shareholders are entitled to receive a stated liquidation preference
amount of $25,000 per share (plus any accumulated but unpaid dividends) in any
liquidation, dissolution or winding up of the relevant Applicant, before any
distribution or payment to holders of the Applicant's common shares. Dividends
declared and payable on the ARPS have a similar priority over dividends declared
and payable on the Applicant's common shares. The ARPS are essentially perpetual
securities and are not subject to mandatory redemption by an Applicant so long
as the applicable Applicant meets certain asset coverage tests specified in its
"Statement Establishing and Fixing the Rights and Preferences" of such
Applicant's ARPS (each, a "Statement"). Each Applicant remains in compliance
with all applicable asset coverage requirements. The ARPS are redeemable at the
applicable Applicant's option, provided that certain conditions are met and
certain procedural provisions set forth in the applicable Statement are followed
and are subject to purchase by the Applicants in accordance with the provisions
of the 1940 Act.
Under market conditions as they existed prior to February 2008, dividend rates
on the ARPS for each rate period (e.g., either weekly or every 28 days,
depending on the particular series of ARPS) were set at the market clearing rate
determined through an auction process maintained and administered by
unaffiliated broker-dealers that brought together bidders, who sought to buy
ARPS, and holders of ARPS, who sought to sell their ARPS. Each Applicant's
Statement generally provides that, if an auction fails to clear (because of an
imbalance of sell orders over bids), the dividend payment rate over the next
dividend period is set at a specified maximum applicable rate (the "Maximum
Rate"), determined in accordance with such Statement. Under the applicable
Statement, the Maximum Rate is determined by reference to an applicable
short-term market interest rate (such as LIBOR, an applicable commercial paper
rate or a rate based on U.S. Treasury securities). An unsuccessful auction is
not a default under the terms of the ARPS Statements. In the case of a failed
auction and pursuant to the applicable Statement, the relevant Applicant
continues to pay dividends to all ARPS shareholders, but at the specified
Maximum Rate rather than a market clearing rate. Since February 2008, the
Maximum Rate has been triggered due to failed auctions for the Applicants; prior
to such time, the Maximum Rate had never been triggered.
AUCTION FAILURES
The history of the auction market for various auction rate securities, including
those issued by municipalities and by other registered closed-end investment
companies, was that auction failures were virtually unheard of, and auctions
generally provided readily available liquidity to holders for over twenty years.
Prior to the failure of the auction market, if investors did not purchase all of
the auction rate securities tendered for sale at an auction, dealers would enter
into the auction and purchase any excess auction rate securities to prevent the
auction from failing. Dealers provided this liquidity using their own balance
sheets, even though they had not entered into any agreements requiring them to
do so. During 2008, many financial institutions were required to take
substantial write-downs on investments held on their balance sheets due, in
part, to the slowdown of the real estate market and the sub-prime mortgage
crisis. As a result of these events and other pressures, the financial
institutions that historically provided "back stop" liquidity for the auction
rate securities auction market stopped participating in auction rate securities
auctions in February 2008. The Applicants believe that after the first auction
rate securities auction failures, investors became increasingly concerned that
Page 4 of 24
they would not be able to sell their auction rate securities, and then sought to
sell auction rate securities en masse, exacerbating the imbalance between buyers
and sellers and making it increasingly unlikely that the auction markets could
function normally.
Consistent with patterns in the broader market for auction rate securities,
beginning in February 2008, as noted above, the Applicants have experienced
unsuccessful auctions due to an imbalance between buy and sell orders. As a
result, the holders of the Applicants' ARPS who desired to sell their shares at
auction have been unable to do so. During this period when sales have not
occurred, the holders have been receiving the Maximum Rate on the ARPS.
The auction markets for auction rate securities of the kind issued by the
Applicants are not currently functioning normally, and the Applicants believe
that such auction markets are unlikely to return to normalcy. If any financial
institution were to enter into an auction for auction rate securities in the
manner dealers had done so prior to February 2008, the current holders of
auction rate securities might attempt to sell their auction rate securities all
at once. As there is no current mechanism that provides a financial institution
with the ability to dispose of auction rate securities it acquires, the
Applicants do not believe it is likely that any financial institution will
attempt to provide liquidity to the current auction rate securities market. The
Applicants also believe that an established secondary market for auction rate
securities does not exist today.
THE HARM TO HOLDERS OF AUCTION RATE PREFERRED SHARES
The Applicants' registration statements and disclosure documents included
disclosure to the effect that, among other things, the ARPS might not trade
through the auction process. The holders of ARPS may have anticipated liquidity
based on the history of the auction market (prior to February 2008) for various
auction rate securities, including those issued by municipalities and registered
closed-end investment companies, which had previously functioned normally. For
over twenty years, auction rate securities traded successfully at auctions with,
so far as Applicants are aware, very few exceptions. In light of this history,
it may be reasonable to assume that the holders of auction rate securities,
including the holders of the Applicants' ARPS, believed that these securities
were highly liquid. In addition, since February of 2008, it has been reported
that many investors were advised by their brokers and financial advisers that
auction rate securities were short-term and highly liquid, were an attractive
alternative to other short-term investments because of their somewhat higher
yield, and in many situations were the equivalent of cash. In light of events
that have unfolded, the Applicants now understand that some brokers and
financial advisers recommended that their customers invest their short-term cash
balances in auction rate securities of several different issuers, each with a
scheduled weekly auction on a different day of the week, so that the customers
would have ready access on any business day to a portion of their short-term
cash portfolio. The majority of the Applicants' ARPS are held of record in
broker "street name" or other nominee accounts.(2)
_______________________
(2) According to a Schedule 13D filed with the Commission by Karpus
Management, Inc., d/b/a Karpus Investment Management ("KIM"), on April
10, 2009, KIM beneficially owned 771 shares (representing 87.61%) of
the outstanding ARPS of the Four Corners Fund.
Page 5 of 24
Because the auction process is no longer functioning normally and no established
secondary market exists, there currently is no reliable mechanism for holders of
auction rate securities, including the Applicants' ARPS, to obtain liquidity.
The Applicants believe that, industry-wide, the current lack of liquidity is
causing distress for a substantial number of auction rate securities holders and
creating hardships for many investors, who may have need for liquidity. The
Applicants have received communications from certain of their ARPS shareholders
regarding the difficulties that they face. For example, a shareholder who is
retired reported needing the proceeds of his ARPS for living and medical
expenses for himself and his wife. This story illustrates the need to provide
additional liquidity to ARPS shareholders.
LIQUIDITY SOLUTIONS TO DATE FOR THE APPLICANTS
Financing Arrangements. As of December 31, 2007, the Applicants had outstanding
ARPS with a total liquidation preference of $157 million. As of April 15, 2009,
the Applicants have retired $55 million of ARPS, as described below, using
borrowings from a revolving credit facility. Tests based on the 300% asset
coverage test were incorporated into the credit facility documents. The total
amounts (by aggregate liquidation preference) of ARPS retired by each of the
Applicants are as follows:
DOLLAR AMOUNT OF ARPS
APPLICANT RETIRED THROUGH 4/15/09
Four Corners Fund $35,000,000
Four Corners Fund II $20,000,000
As of April 15, 2009, the Applicants had the following amounts (by aggregate
liquidation preference) of ARPS outstanding:
DOLLAR AMOUNT OF ARPS
APPLICANT OUTSTANDING AS OF 4/15/09
Four Corners Fund $22,000,000
Four Corners Fund II $80,000,000
In each case in which the Applicants have retired ARPS, the cost of the
replacement leverage is expected, over time, to be less than the total cost of
ARPS based on the Maximum Rate applicable to the ARPS of such Applicants.
Liquidity Protected Preferred Shares/New Shares. Applicants are aware that
certain market participants have taken steps to develop potential preferred
equity-based instruments to address the liquidity problems posed by the failure
of the auction rate securities markets to function normally. In this regard,
Applicants note the Commission staff has provided Eaton Vance Management with
no-action relief in connection with Liquidity Protected Preferred Shares ("LPP
Shares"), a new type of preferred stock that certain Eaton Vance closed-end
funds potentially would issue to supplement or replace their existing auction
rate securities. LPP Shares would be issued subject to a commitment by a
designated liquidity provider to purchase the LPP Shares for the full
Page 6 of 24
liquidation preference amount in certain circumstances.(3) The no-action relief
clarifies that LPP Shares would be eligible for investment by money market
funds, which would likely open up a large new market of potential buyers. The
Internal Revenue Service (the "IRS") has also issued guidance intended to
provide greater certainty and flexibility regarding certain Federal tax issues
that have arisen in connection with efforts (such as the issuance of LPP Shares)
to address liquidity needs in the auction rate securities market.(4)
While Applicants believe that the no-action letter and the IRS guidance are
significant first steps towards the development of a market for LPP Shares and
certain similar types of preferred shares,(5) it is uncertain how rapidly the
market for such securities will develop. While Applicants may also develop a
form of liquidity protected preferred shares (referred to hereinafter as the
"New Shares") similar to the LPP Shares (in reliance on the Eaton Vance
no-action letter or similar relief) or the VRDP Shares, the ability to issue
such New Shares by one or more Applicants is conditional upon completion of
successful negotiation with a remarketing agent and liquidity provider, approval
by each Applicant's respective Board and rating agencies, the successful
placement of the New Shares offering with money market funds and other
institutional investors and receipt of any necessary interpretative or exemptive
relief on behalf of the Applicants. Accordingly, there can be no certainty as to
when, or if, the Applicants may be able to develop and issue New Shares to
supplement or replace their existing ARPS. The Applicants are therefore seeking
the Order to facilitate possible temporary borrowings by each Applicant and to
provide each Applicant with the flexibility to refinance its ARPS more quickly
than might be possible through the eventual development of a market for New
Shares.(6) The temporary relief requested hereby will enhance the Applicants'
ability to provide a liquidity solution to the holders of their ARPS in the near
term, while also seeking, over the somewhat longer term, a more permanent form
of replacement leverage that complies in full with the asset coverage
requirements of Section 18 of the 1940 Act.
REQUESTED RELIEF
Under Section 18(a)(1), any class of senior security of a registered closed-end
company that represents an indebtedness must have, immediately after its
issuance or sale, an asset coverage of at least 300%, with provision made
generally to prohibit declarations of dividends or distributions on the
_______________________
(3) See Eaton Vance Management, SEC No-Action Letter (June 13, 2008).
(4) IRS Notice 2008-55 (June 13, 2008, as revised June 25, 2008).
(5) In this regard, Applicants are aware that certain closed-end funds of
another fund complex have offered "Variable Rate Demand Preferred
Shares" ("VRDP Shares"). VRDP Shares include a liquidity feature
provided by a bank that allows holders of VRDP Shares to elect to have
their shares purchased by a liquidity provider on seven days' notice in
the event that sell orders have not been matched with purchase orders
in a weekly remarketing process.
(6) Certain lenders impose the 1940 Act's 300% asset coverage restriction
in their lending documents; however, the Applicants believe that, in
light of relief similar to that requested herein being granted by the
Commission, lenders may follow the Commission's lead in reducing their
own asset coverage requirements.
Page 7 of 24
company's stock or the repurchase of stock unless the 300% asset coverage is
maintained, except that dividends may be declared upon the company's preferred
stock if the indebtedness has asset coverage of at least 200% at the time of
declaration, after deducting the amount of the dividend.
For the reasons stated above, the Applicants request that the Commission issue
an order of exemption permitting each Applicant to refinance with indebtedness
any outstanding ARPS that were issued prior to February 1, 2008, subject, on a
temporary basis, to the 200% asset coverage requirement for stock that applies
to the Applicants' existing ARPS, rather than the 300% asset coverage
requirement that would ordinarily apply to indebtedness. In addition, the
Applicants request an exemption from Section 18(a)(1)(B) of the 1940 Act so that
each Applicant may, in connection with the refinancing referred to above and to
the extent that compliance with Section 18(a)(1)(B) is not excused in the
circumstances by Section 18(g) of the 1940 Act(7), make provision to prohibit
the declaration of dividends or distributions and the purchase of its capital
stock (including its ARPS) unless, at the time of any declaration or purchase
and after deducting the amount of such dividend, distribution or purchase price,
it meets the 200% asset coverage requirement for stock that applies in respect
of the Applicants' existing ARPS, rather than the asset coverage of 300%
ordinarily required.(8)
Each Applicant seeks the requested relief on a temporary basis only --
specifically for the period from the date on which the requested Order is issued
until October 31, 2010 (the "Exemption Period"). Each Applicant which borrows in
reliance on the Order proposes that (absent any other applicable relief), it
would either pay down or refinance the debt within the Exemption Period so that,
upon expiration of the Exemption Period, absent any other applicable relief, it
will have asset coverage of at least 300% for any class of senior securities
representing indebtedness. Moreover, each Applicant proposes that it be
permitted during the Exemption Period to adjust the level of its outstanding
borrowings in order to permit the Applicant to maintain a leverage ratio
consistent with (i) the leverage ratio, as of the date on which the Order is
issued, that the Applicant expects to maintain on average over an extended
period of time, provided that no borrowings for ARPS Refinancings exceed the
level at which such borrowings were originally entered into and (ii) the
Applicant's undertaking pursuant to this request to reduce leverage over time to
the extent necessary to ensure that it will have asset coverage of at least 300%
for any class of senior securities representing indebtedness upon expiration of
the Exemption Period (absent any other applicable relief).
The Applicants submit that the Exemption Period is an appropriate period of time
for the proposed temporary relief from Sections 18(a)(1)(A) and 18(a)(1)(B).
Because of the limited availability of debt financing in the current, severely
_______________________
(7) Section 18(g) of the 1940 Act provides, among other things, that a
promissory note or other evidence of indebtedness issued in
consideration of any loan, extension or renewal thereof, made by a bank
or other person and privately arranged, and not intended to be publicly
distributed, is not a "senior security" for purposes of Section
18(a)(1)(B).
(8) Except as permitted under the requested Order, if issued (and any other
applicable relief), the Applicants would meet all of the asset coverage
requirements of Section 18(a) of the 1940 Act during the Exemption
Period.
Page 8 of 24
constrained capital markets, the Applicants believe that the negotiation,
execution and closing of a borrowing transaction to replace the leverage
currently represented by the ARPS, if it can be effected, might take several
months following the issuance of the Order. Once the debt incurred to refinance
the ARPS is in place, it is uncertain whether and when the Applicants will be
able to issue New Shares to replace the debt or how quickly the securities and
capital markets will return to conditions that would enable the Applicants to
achieve compliance with the asset coverage requirements that would apply in the
absence of the Order through some other means. In particular, the Applicants
believe that the offering of any New Shares could take 12 to 18 months or longer
to complete. Each issuance of New Shares will be subject to the negotiation and
execution of various agreements. In addition, Applicants note that a large
number of issuers of existing auction rate securities of various types, in
addition to the Applicants, may seek to issue similar new securities, and the
market may require a considerable time to absorb all of the new issuances. In
light of these factors, and given the continuing unsettled state of the
securities and capital markets, which makes it impossible to establish a precise
schedule for consummating capital markets transactions, the Applicants believe
that the Exemption Period is reasonable and appropriate.
The proposed refinancing of the existing ARPS with debt is expected, over the
long term, to be favorable to both the common shares and the ARPS shareholders
of the Applicants. The proposed refinancing of the existing ARPS with debt would
potentially provide liquidity to the Applicants' current ARPS shareholders.
Further, although there can be no certainty regarding financing costs under
future market conditions, the proposed refinancing is also expected to benefit
the common shareholders to the extent that the debt, over time, is a lower cost
form of leverage than the cost of existing ARPS based on their Maximum Rates.
First Trust and Four Corners believe that it is currently possible to obtain
financing terms for the Exemption Period that compare favorably with the cost of
the existing ARPS at their Maximum Rates and are optimistic that longer term
solutions that also compare favorably may be found. As contemplated, the
refinancing of ARPS with debt would permit the Applicants to avoid deleveraging
in the short term. As explained below, a forced deleveraging would likely be
detrimental to the common shareholders in terms of erosion of an Applicant's
capital base (resulting from forced sales of portfolio holdings at distressed
prices, which may be even more severe during periods of constrained market
liquidity, plus transaction costs and possible tax recognition events) and the
accompanying reduction in potential distributions and returns over time that
could be expected to adversely affect the market price at which an Applicant's
common shares trade in the secondary market.
The specific terms of refinancing the Applicants' ARPS with debt, the economic
attractiveness of the transaction to the Applicants and the benefits and costs
of the transaction to the Applicants' common shareholders and the holders of the
ARPS will depend upon the circumstances that exist at the time such a
transaction is negotiated, and cannot be predicted with any degree of certainty.
The terms of any such transaction, once known, will be submitted to the
respective Applicant's Board for consideration, along with any alternative
courses of action that may then be available. (As with the terms of the possible
borrowing, the alternative courses that may be available for consideration by
the Board will depend upon circumstances as they then exist and cannot be
predicted with any degree of certainty.)
Page 9 of 24
In considering any incurrence of debt to refinance the remaining outstanding
ARPS, the members of each Applicant's Board will weigh carefully the benefits
and costs of the proposals to the common shareholders and the ARPS shareholders.
As with any decision to incur, maintain, replace, reduce or eliminate leverage
in a closed-end investment company, each Applicant's Board will consider, in
connection with any proposed borrowing by that Applicant that may be permitted
under the requested Order, among other things, the expected costs of the debt,
the availability and terms of financing (including matters such as fees and
lenders' requirements related to the grant of a security interest in all or a
portion of an Applicant's assets), credit market conditions, and the investment
return expected to be potentially available on portfolio assets that have been
or may be retained or acquired using leverage (all of which are generally highly
unpredictable and may vary significantly from one point in time to another).
Each Applicant's Board will also consider any alternative courses of action
that, in the Board's judgment, might be in the best interests of that Applicant,
its common shareholders and its ARPS shareholders. The specific borrowing
transactions, if any, that the Board may consider in reliance on the Order, the
specific information that the Board may receive, request or consider in
connection therewith, the specific alternatives that the Board may consider and
the specific factors that may lead the Board to approve or disapprove a proposed
borrowing, or some alternative course of action, cannot yet be known.
The Board of an Applicant that borrows in reliance on the Order will receive and
review, no less frequently than quarterly during the Exemption Period, detailed
progress reports prepared by management (or other parties selected by those
Trustees who are not "interested persons" (as defined in Section 2(a)(19) of the
1940 Act) ("Independent Trustees")) regarding and assessing the efforts that the
Applicant has undertaken, and the progress that the Applicant has made, towards
achieving compliance with the appropriate asset coverage requirements under
Section 18 by the expiration of the Exemption Period. The regular meetings of
the Board of any such Applicant during the Exemption Period, until such time as
compliance with such asset coverage requirements has been achieved, will include
time for the presentation and discussion of such reports and of the progress
that such Applicant has made towards achieving compliance with the asset
coverage requirements. To the extent that the Board or the Independent Trustees
deem appropriate, these matters will also be scheduled for discussion at other
meetings of the Board or relevant committees thereof, and/or during executive
sessions of the Independent Trustees.
II. ANALYSIS
A. APPLICABLE SECTIONS OF THE 1940 ACT
Section 18(a)(1)(A) of the 1940 Act provides that it is unlawful for any
registered closed-end company to issue any class of senior security, or to sell
such security of which it is the issuer, unless, if such class of senior
security represents an indebtedness, immediately after such issuance or sale, it
will have an asset coverage of at least 300%.
Section 18(a)(2)(A) of the 1940 Act provides that it is unlawful for any
registered closed-end company to issue any class of senior security, or to sell
any such security of which it is the issuer, unless, if such class of senior
Page 10 of 24
security is a stock, immediately after such issuance or sale it will have an
asset coverage of at least 200%.
Section 18(a)(1)(B) of the 1940 Act provides that it is unlawful for any
registered closed-end company to issue any class of senior security, or to sell
any such security of which it is the issuer, that represents an indebtedness
unless it has made provision to prohibit the declaration of any dividend (except
a dividend payable in stock of the company) or the declaration of any other
distribution on any class of its capital stock, or the purchase of any of its
capital stock, unless, at the time of the declaration or purchase (after
deducting the amount of the dividend, distribution, or purchase price) it will
have an asset coverage of at least 300%, except that dividends may be declared
on any preferred stock if the senior security representing indebtedness has an
asset coverage of at least 200% at the time of declaration after deducting the
amount of the dividend.
Section 18(a)(2)(B) of the 1940 Act provides that it is unlawful for any
registered closed-end company to issue any class of senior security that is a
stock, or to sell any such security of which it is the issuer, unless it has
made provision to prohibit the declaration of any dividend (except a dividend
payable in common stock of the company) or the declaration of any other
distribution on its common stock, or the purchase of any of its common stock,
unless, at the time of the declaration or purchase (after deducting the amount
of the dividend, distribution or purchase price) it will have an asset coverage
of at least 200%.
Section 18(g) of the 1940 Act provides, among other things, that "senior
security," for purposes of Section 18(a)(1)(B), does not include any promissory
note or other evidence of indebtedness issued in consideration of any loan,
extension or renewal thereof, made by a bank or other person and privately
arranged, and not intended to be publicly distributed.
Section 18(h) of the 1940 Act defines "asset coverage" of a class of senior
security representing an indebtedness of an issuer to mean the ratio which the
value of the total assets of such issuer, less all liabilities and indebtedness
not represented by senior securities, bears to the aggregate amount of senior
securities representing indebtedness of such issuer. Section 18(h) of the 1940
Act defines "asset coverage" of a class of senior security of an issuer which is
a stock to mean the ratio which the value of the total assets of such issuer,
less all liabilities and indebtedness not represented by senior securities,
bears to the aggregate amount of senior securities representing indebtedness of
such issuer plus the aggregate of the involuntary liquidation preference of such
class of senior security which is a stock. The involuntary liquidation
preference of a class of senior security which is a stock is deemed to mean the
amount to which such class of senior security would be entitled on involuntary
liquidation of the issuer in preference to a security junior to it.
Section 6(c) of the 1940 Act provides, in part, that the Commission, by order
upon application, may conditionally or unconditionally exempt any person,
security or transaction, or any class or classes of persons, securities or
transactions from any provision of the 1940 Act, if and to the extent 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 1940 Act. The Applicants submit that their request for the
exemptive temporary relief described above is consistent with the standards of
Section 6(c).
Page 11 of 24
B. STATEMENT IN SUPPORT OF APPLICATION
1. Request for Exemptive Relief Is Necessary, Appropriate and in the Public
Interest.
The Applicants believe that the requested temporary exemptive relief is
necessary, appropriate and in the public interest because, as noted above in
Section I under the headings Auction Failures and The Harm to Holders of Auction
Rate Preferred Shares, the illiquidity of ARPS still affects certain holders of
the Applicants' ARPS in light of the ongoing dormancy of the auction rate
market. The proposed refinancing of the ARPS with debt, if approved by the Board
of an Applicant, would provide liquidity for the Applicants' ARPS shareholders,
while the Applicants continue their diligent efforts to obtain a more permanent
form of financing (such as through the issuance of the New Shares, as described
above) that fully complies with the statutory asset coverage requirements of
Section 18. Notably, the Order would permit the Applicants to continue to
provide their common shareholders with the potential for enhanced distributions
and returns that leverage may provide, without disrupting the declaration of the
dividends or other distributions that the Applicants have historically made with
respect to their common shares(9) and to help avoid the potential harm to the
common shareholders that could result if the Applicants were to deleverage their
portfolios in the current difficult market environment. To delever their
portfolios, the Applicants may be forced to sell portfolio investments into a
market that may be characterized by an imbalance between buyers and sellers and
a consequent lack of a depth of liquidity, resulting in the Applicants being
able to sell portfolio investments only for far less than their current
intrinsic worth. Deleveraging may further potentially disadvantage the
Applicants' common shareholders by reducing their potential distributions and
returns which, in turn, may reduce the market price of the common shares. In
determining that develeraging would not be appropriate under current market
conditions, First Trust considered the following factors, among others:
_______________________
(9) The Applicants believe that their common shareholders expect regular
distributions. Each of the Applicants has declared and paid dividends
on its common shares on a monthly basis since shortly after commencing
operations. In addition, for the Applicants to continue to qualify as
regulated investment companies under the Internal Revenue Code of 1986,
as amended, and to receive favorable tax treatment thereunder, it is
necessary, among other things, for each Applicant to distribute at
least 90 percent of its investment company taxable income and net
tax-exempt interest income (if any) during each taxable year. By
permitting each Applicant to declare dividends and distributions, on a
temporary basis, subject to a 200% asset coverage requirement under
Section 18(a)(1)(B), it is expected that the Applicant will be able to
refinance ARPS as described in this Application without putting at risk
the Applicant's ability to maintain its status as a regulated
investment company.
It is possible that, in connection with a borrowing incurred to
refinance outstanding ARPS, the Applicants will issue a senior security
constituting indebtedness that is in consideration of a loan, made by a
bank or other person and privately arranged, and not intended to be
publicly distributed. Under Section 18(g), such a borrowing would not
require the Applicants to make the provision referred to in Section
18(a)(1)(B). However, the Applicants cannot rule out the possibility
that they will incur borrowings that do not meet the Section 18(g)
criteria, and are thus requesting relief from Section 18(a)(1)(B).
Page 12 of 24
o The detailed knowledge of First Trust and Four Corners, based
on their long experience managing investments of the kinds
held by the respective Applicants, of the market for these
investments.
o The difficulty in the recent and current markets for floating
rate senior secured loans (which represent a significant
portion of each Applicant's portfolio), of selling these
loans at par value, due to the recent and current reduced
liquidity in the market for these loans. First Trust and Four
Corners believe that this reduced liquidity has resulted in
substantial part from the inability or unwillingness of
traditional market makers to continue to make a market in
these instruments, as a result, in part, of the market
makers' own impaired capital positions. First Trust and Four
Corners currently expect that the obligors of these loans
(which generally have stated maturities between 5-7 years)
generally will be able to repay many of the loans in full as
they come due. Therefore, it would be disadvantageous to the
Applicants to sell the loans at less than par into the
current market. (10)
Due to the foregoing reasons, the Applicants do not believe deleveraging, in the
current market environment, is a reasonable method to provide liquidity to the
Applicants' remaining ARPS shareholders. Although the Applicants believe that
current or future borrowing arrangements will allow them to refinance their
ARPS, the Applicants can provide no assurance that if the Commission grants the
Order, the Applicants will be able to refinance all of their ARPS using the
proceeds of borrowings. Applicants note that the illiquidity of ARPS is a
unique, exigent situation that is posing many hardships on certain ARPS
shareholders.
The Applicants submit that the current state of the credit markets, which has
affected auction rate securities of all types, including the Applicants' ARPS,
is an historic occurrence of unusual severity and requires a creative and
flexible response on the part of both the private and public sectors. The
Applicants believe that these issues have created an urgent need for limited,
prompt, thoughtful and responsive solutions and believe that the requested
temporary relief is necessary, appropriate and in the public interest.
2. Request for Exemptive Relief Is Consistent with the Protection of Investors
and the Purposes Fairly Intended by the Policy and Provisions of the 1940
Act (and Section 18 in Particular).
The 1940 Act was adopted following a series of reports regarding investment
trusts and investment companies prepared by the Commission at the direction of
Congress, and extensive Congressional hearings. In Section 1(b) of the 1940 Act,
Congress declared that the national public interest and the interest of
investors are adversely affected by eight specifically enumerated business
practices of investment companies and their operators, several of which
apparently relate to the capital structure of investment companies. These
include:
_______________________
(10) First Trust and Four Corners have observed that as of March 31,
2009, a broad index of leveraged loans was trading at an average
price of approximately 65.6% of par value.
Page 13 of 24
"(2) when investment companies are organized, operated,
managed, or their portfolio securities are selected . . . in
the interest of special classes of their security holders, . . .
rather than in the interest of all classes of such
companies' security holders;"
"(3) when investment companies issue securities containing
inequitable or discriminatory provisions, or fail to protect
the preferences and privileges of the holders of their
outstanding securities;"
"(4) when the control of investment companies is unduly
concentrated through pyramiding or inequitable methods of
control, or is inequitably distributed . . .;"
* * *
"(7) when investment companies by excessive borrowing and the
issuance of excessive amounts of senior securities increase
unduly the speculative character of their junior securities;"
or
"(8) when investment companies operate without adequate assets
or reserves."
One commentator has summarized the extensive record of Congressional concerns
relating to investment company capital structures that emerged from the hearings
that led to the adoption of the 1940 Act as follows:
Congressional hearings in 1940 revealed that some investment
companies borrowed heavily from the public without adequate
assets and reserves. The companies' capital structures were
very complex, composed of many classes of securities with
various dividends, and liquidation and voting rights.
Furthermore, before 1940, investment companies were free to
borrow funds for securities speculation, whereas broker
dealers were restricted in the extent to which they could
provide loans for customers to finance securities
transactions. The unequal regulation of investment companies
and broker dealers in securing loans for securities
transactions was not justified. The economic effect of
borrowing by investment companies was similar to the economic
effect of borrowing by broker dealers' customers. Both use the
loans to trade in securities. Furthermore, the existence of
senior securities conflicted with the theory of mutuality of
risk, which provided one of the justifications for investment
company utility. In addition, senior securities gave the
misleading impression of safety from risk and increased the
speculative nature of both the common stock and senior
securities.
Page 14 of 24
Complex capital structures induced controlling common
stockholders to invest in risky securities to produce income
necessary to cover the high cost of money: this complexity
enabled insiders to manipulate the allocation of expenses and
profits among the various companies; it facilitated control
without equity investment or any other investment; and it made
it difficult for investors to value the securities of
investment companies. Section 18 was designed to ameliorate
these problems.
The original bill flatly prohibited investment companies from
issuing and selling senior securities. After extensive
hearings, a minor exception was given to open-end investment
companies, and a few exceptions were carved out for closed-end
investment companies ....(11)
Reviewing the requested temporary exemptive relief for the Applicants in light
of the foregoing recitation of policy concerns leads to the conclusion that in
these unique, exigent circumstances the protection of investors and the purposes
fairly intended by the policy and provisions of the 1940 Act would be served by
granting a limited exemption permitting the refinancing of existing ARPS with
indebtedness having the same 200% minimum asset coverage as currently applies to
the ARPS.(12) Specifically:
(1) The interests of both classes of the Applicant's current
investors would be well served by the proposal -- the ARPS shareholders
because they would achieve the liquidity that the market currently is
not providing, and the common shareholders because (a) the Applicants'
potential for enhanced distributions and returns would be improved to
_______________________
(11) Tamar Frankel, The Regulation of Money Managers ss.21.05 (2008);
citations omitted. Despite the abundance of information and commentary
regarding the abuses that prompted Congress to adopt Section 18 of the
1940 Act, the record is quite sparse as to the reason for the different
levels of asset coverage provided for closed-end fund senior securities
that represent, respectively, indebtedness (300%) and stock (200%).
Professor Frankel cites testimony from David Schenker at a 1940 Senate
hearing to the effect that "debentures should be protected because they
sacrifice return for security of investment." Hearings on S. 3580
before a Subcommittee of the Committee on Banking and Currency, U.S.
Senate, at 1116-17 (1940). It perhaps stands to reason that, if a
closed-end fund chooses to exercise its ability to issue both debt and
preferred equity, a higher level of protection against the risk of
default should be afforded to the debt than to the preferred stock. But
protection of that kind is provided automatically by the mere fact that
the debt ranks senior in the capital structure to any outstanding
preferred stock.
(12) The Small Business Incentive Act of 1980 (the "1980 Act") made the same
accommodation when it amended the 1940 Act to impose a lower level of
asset coverage for debt to 200% for business development companies
("BDCs"). See 15 U.S.C.S. ss.80a-60(a)(1). The legislative history of
the 1980 Act indicates that Congress considered the "special needs of
such companies, while at the same time preserving important investor
protections." (H.R. No. 96-1341, at 4804 (1980)). One of the "special
needs" that may have led Congress to allow BDCs to issue debt with only
200% asset coverage is that the securities they purchase are "not
readily marketable" and "are illiquid and may remain so for several
years." (R. Thomas and P. Roye, Regulation of Business Development
Companies under the Investment Company Act, 55 S. Cal. L. Rev. 895,
904, 905 (1982)).
Page 15 of 24
the extent that the cost of the new form of leverage is, over time,
less than that of the total cost of ARPS based on their applicable
Maximum Rates without disruption to the declarations of dividends and
other distributions that common shareholders may expect; and (b) the
potential adverse consequences of deleveraging would be avoided.
(2) The proposed borrowings would be obtained from
sophisticated financial institutions. (Each of the participating
financial institutions will be a bank (as defined in Section 2(a)(5) of
the 1940 Act), an insurance company (as defined in Section 2(a)(17) of
the 1940 Act), or a qualified institutional buyer (as defined in Rule
144A(a)(1) under the Securities Act of 1933)). These financial
institutions would be (a) willing to make loans on the basis of 200%
asset coverage; and (b) capable of assessing the risk associated with
the transactions. Such a lender would not need the additional
protection that Congress in 1940 might have believed retail purchasers
of investment company debentures required or expected.
(3) The proposed liquidity solution does not "fail to protect
the preferences and privileges of the holders of [the Applicants']
outstanding securities" (Section 1(b)(3), 1940 Act); the refinancing of
the existing ARPS (whether by purchase or redemption) would be effected
in full accordance with the relevant provisions of each Applicant's
respective Statement relating to the terms, rights, preferences and
privileges of the ARPS.(13) The 200% asset coverage requirement
applicable to the declaration of dividends or distributions and the
repurchase of an Applicant's capital stock, including ARPS, would limit
the ability of the common shareholders to obtain assets of the
Applicants to the detriment of the debt holders in accordance with the
underlying purposes of Section 18(a)(1)(B) of the 1940 Act. In
addition, the lenders who participate in the borrowings will all be
sophisticated institutional buyers who are capable of weighing the
risks inherent in such lowered asset coverage limits. The common
shareholders would continue to have the same rights and preferences
that they have always had; after the ARPS have been retired, the total
amount of leverage and claim on dividends will be the same as it was
when the Applicants' capital structure was comprised of ARPS and common
shares.
(4) The proposed liquidity solution would not "by excessive
borrowing and the issuance of excessive amounts of senior securities
increase unduly the speculative character of [the Applicants'] junior
securities" (Section 1(b)(7), 1940 Act); the Applicants would be no
more highly leveraged if they refinance the existing ARPS with
borrowing, so there would be no increase in the risk to the common
shareholders other than the risk that the borrowing cannot be
refinanced on favorable terms when it matures.(14) The Applicants note
that the proposed liquidity solution is temporary and that by the end
_______________________
(13) Any Applicant that has debt outstanding, at the time of any borrowing
by such Applicant in reliance on the Order, will obtain any consents to
such borrowing that may be required under the terms of any such
outstanding debt.
(14) The Applicants acknowledge that the perpetual nature of the ARPS makes
them in that respect a more attractive source of leverage than
borrowing, which by its terms must be repaid or refinanced at or before
a stated maturity date. The Applicants further acknowledge that
managing any portfolio that relies on borrowing for leverage entails
Page 16 of 24
of the Exemption Period, the Applicants would be in compliance with the
relevant asset coverage requirements (absent any other applicable
relief). Accordingly, to the extent the 1940 Act's asset coverage
requirements were aimed at limiting leverage because of its potential
to magnify losses as well as gains, the proposed liquidity solution
would not unduly increase the speculative nature of the Applicants'
common shares because the relief is temporary, and the Applicants would
be no more highly leveraged if they refinance the existing ARPS with
borrowing.
(5) The proposed liquidity solution would not make the
Applicants' capital structure more complex, opaque or hard to
understand. Each Applicant has already retired a portion of its ARPS
and, to the extent it fully replaces its currently outstanding ARPS
with senior securities representing indebtedness, would, as a result,
have two classes of outstanding securities, one senior and one junior,
as was the case prior to the retirement of a portion of the ARPS. The
proposed liquidity solution would actually simplify the capital
structure of the Applicants, which currently consists of senior
securities representing indebtedness, senior securities which are stock
(i.e., the ARPS), and common stock.
(6) The proposed liquidity solution would not result in undue
concentration of the control of investment companies through
"pyramiding," or inequitable methods or distribution of control
(Section 1(b)(4), 1940 Act).(15) The Order would not apply to the
Applicants' obligations under Section 12(d)(1) of the 1940 Act, and as
such the pyramiding of control that was typically present with complex
capital structures prior to the enactment of the 1940 Act would not be
present, or possible.
(7) The proposed liquidity solution would not result in the
Applicants' maintaining a lower level of reserves, in relation to the
amount of their outstanding obligations to senior security holders,
than they have historically been required to maintain (Section 1(b)(8),
1940 Act).
_______________________
the risk that, when the borrowing matures and must be repaid or
refinanced, an economically attractive form of replacement leverage may
not be available in the capital markets. For that reason, any portfolio
that relies on borrowing for leverage is subject to the risk that it
may have to deleverage. As explained above, depending upon the
circumstances, deleveraging could be disadvantageous to the holders of
the leveraged portfolio's common shares, insofar as it may disrupt
portfolio management, reduce portfolio investment returns and
potentially reduce the value of the common shares. The Applicants thus
regard leveraging through borrowing as potentially a temporary, interim
step, with the issuance of a new type of preferred stock, such as the
New Shares, as a possible longer-term replacement source of portfolio
leverage.
(15) It appears that, prior to the adoption of the 1940 Act, voting power in
many investment companies was concentrated in the hands of insiders who
held the only voting shares in complex, multi-layered capital
structures. One of the reasons for limiting the amount and complexity
of closed-end fund capital structures was to eliminate the possibility
that (absent default on a senior security) voting control would rest
other than with the common shareholders.
Page 17 of 24
For the aforementioned reasons, the Applicants believe that the request for the
Applicants to be allowed to substitute on a temporary basis a 200% asset
coverage requirement for the 300% asset coverage requirement, in the present,
exigent circumstances, readily meets the standards for exemption under Section
6(c) of the 1940 Act. The Applicants also believe that the requested temporary
relief from Sections 18(a)(1)(A) and 18(a)(1)(B) is necessary, appropriate and
in the public interest and that such relief is consistent with the protection of
investors and the purposes intended by the policy and provisions of the 1940
Act.
3. Applicable Precedents
There is precedent for the relief that the Applicants seek. In In the Matter of
Eaton Vance Floating Rate Income Trust, et al.,(16) the Commission issued an
order under Section 6(c) of the 1940 Act exempting certain closed-end management
investment companies (the "Eaton Vance applicants") from Sections 18(a)(1)(A)
and 18(a)(1)(B) of the 1940 Act. The order permits the Eaton Vance applicants to
issue debt securities subject to asset coverage of 200% that would be used to
refinance issued and outstanding auction preferred shares. The order also
permitted the Eaton Vance applicants to declare dividends or any other
distributions on, or purchase, capital stock during the term of the Commission's
order, provided that any class of senior securities representing indebtedness
had asset coverage of at least 200% after deducting the amount of the
transaction. The Commission issued substantially similar relief in In the Matter
of Calamos Convertible Opportunities and Income Fund, et al.(17) The Applicants
are willing to agree that any order of the Commission granting their requested
relief would be subject to conditions that are identical to those contained in
the Eaton Vance and Calamos applications.
Further, in the past, the Commission also has shown a very limited willingness
to relax the asset coverage tests applicable to senior securities issued by
closed-end investment companies, albeit in significantly different circumstances
than those that the Applicants now face. For example, in In the Matter of G.E.
Employees Securities Corporation,(18) the Commission granted relief from a
number of provisions of the 1940 Act to an employees' securities company. As
part of the relief granted to the employees' securities company, the Commission
relaxed the 300% asset coverage requirement on indebtedness to a 125% coverage
requirement. The Commission deemed this lesser coverage requirement to be
adequate considering the particular features of the company's capital structure
(which included a number of different debt securities held by or for the benefit
of employees and pensioners of General Electric Company and its affiliates, and
limitations on the equity returns payable to the sole common stockholder,
General Electric Company) as well as the fact that holders of the debt
securities were represented in the management of the employees' securities
company. In In the Matter of Inter-Canadian Corporation,(19) a closed-end
_______________________
(16) Investment Company Act Rel. No. 28,464 (October 23, 2008) (order),
Investment Company Act Rel. No. 28,431 (October 2, 2008) (notice).
(17) Investment Company Act Rel. No. 28,615 (February 10, 2009) (order),
Investment Company Act Rel. No. 28,603 (January 14, 2009) (notice).
(18) Investment Company Act Rel. No. 271 (December 2, 1941).
Page 18 of 24
investment company sought relief from Section 18(a)(1)(A) of the 1940 Act to
facilitate a voluntary acquisition of a controlling interest in an insurance
company, with the goal of discontinuing the company's insurance operations and
obtaining the company's portfolio of investments. To obtain a controlling
interest, the investment company required a bank loan of sufficient size that
the investment company would not comply with the asset coverage requirement of
Section 18(a)(1)(A). However, the investment company expected to be able to
repay the loan within a relatively short period by causing the insurance company
to make distributions, from liquidating its portfolio of investments, to its
stockholders (including the investment company). The loan, by its terms, was to
be repaid within two years, but the Commission required that the loan be repaid
sooner (apparently within approximately seven months). The temporary nature of
the loan, and the fact that the loan would be used to obtain access to liquid
investments that could be used to repay the loan, appear to have been important
to the Commission.
The Applicants submit that the current state of the credit markets, and the
broad, negative impact on investors associated with the current credit markets,
present a strong policy argument in favor of temporarily waiving the 300% asset
coverage requirement for indebtedness as the Commission recognized in the Eaton
Vance and Calamos orders.
III. CONDITIONS
For the reasons set forth herein, the Applicants request that the Commission
issue an order pursuant to Section 6(c) for an exemption from the provisions of
Section 18(a)(1)(A) and Section 18(a)(1)(B) during the Exemption Period. The
Applicants agree that any order of the Commission granting the requested relief
shall be subject to the following conditions:
1. Each Applicant that borrows subject to 200% asset coverage
under the Order will do so only if such Applicant's Board, including a
majority of the Independent Trustees, shall have determined that such
borrowing is in the best interests of such Applicant, its common
shareholders and its ARPS shareholders. Each Applicant shall make and
preserve for a period of not less than six years from the date of such
determination, the first two years in an easily accessible place,
minutes specifically describing the deliberations by the Board and the
information and documents supporting those deliberations, the factors
considered by the Board in connection with such determination, and the
basis of such determination.
2. Upon expiration of the Exemption Period, each Applicant
will have asset coverage of at least 300% for each class of senior
security representing indebtedness.
3. The Board of an Applicant that has borrowed in reliance on
the Order shall receive and review, no less frequently than quarterly
during the Exemption Period, detailed progress reports prepared by
management (or other parties selected by the Independent Trustees)
regarding and assessing the efforts that the Applicant has undertaken,
and the progress that the Applicant has made, towards achieving
_______________________
(19) Investment Company Act Rel. No. 2751 (July 28, 1958).
Page 19 of 24
compliance with the appropriate asset coverage requirements under
Section 18 by the expiration of the Exemption Period. The Board,
including a majority of the Independent Trustees, will make such
adjustments as it deems necessary or appropriate to ensure that the
Applicant comes into compliance with Section 18 of the 1940 Act within
a reasonable period of time, not to exceed the expiration of the
Exemption Period. Each Applicant will make and preserve minutes
describing these reports and the Board's review, including copies of
such reports and all other information provided to or relied upon by
the Board for a period of not less than six years, the first two years
in an easily accessible place.
IV. ADDITIONAL INFORMATION
Pursuant to Rule 0-2 under the 1940 Act, each Applicant declares that this
Application for a Commission order is signed by James A. Bowen as President of
each Applicant pursuant to the general authority vested in him as such by the
Declaration of Trust and By-laws of each Applicant, and by resolution of the
Applicants' Boards.
The verifications required by Rule 0-2(d) and the authorizations
required by Rule 0-2(c) under the 1940 Act are attached hereto as Exhibits A and
B.
Applicants request that any questions regarding this Application be directed to
the persons listed on the facing page of this Application.
A copy of the Declaration of Trust of each of the Applicants is on file with the
Secretary of the Commonwealth of Massachusetts and notice is given that this
Application is executed on behalf of each of these Applicants separately by an
officer of each of these Applicants as an officer and not individually and the
obligations of each Applicant under or arising out of this Application are not
binding upon any of the Trustees, officers or shareholders of any Applicant
individually but are binding only upon the assets and property of such
Applicant.
[The rest of this page is left intentionally blank.]
Page 20 of 24
FIRST TRUST/FOUR CORNERS SENIOR FLOATING
RATE INCOME FUND
FIRST TRUST/FOUR CORNERS SENIOR FLOATING
RATE INCOME FUND II
By: /s/ James A. Bowen
--------------------------------
Name: James A. Bowen
Title: President
Date: May 22, 2009
Page 21 of 24
AUTHORIZATION AND SIGNATURES
In accordance with Rule 0-2(c) under the 1940 Act, the Applicants state that all
actions necessary to authorize the execution and filing of this Application have
been taken, and the person signing and filing this document is authorized to do
so on behalf of the First Trust/Four Corners Senior Floating Rate Income Fund
and First Trust/Four Corners Senior Floating Rate Income Fund II.
James A. Bowen is authorized to sign and file this document on behalf of the
foregoing funds pursuant to resolutions adopted by the foregoing investment
companies' respective Board of Trustees attached as Exhibit B.
FIRST TRUST/FOUR CORNERS SENIOR FLOATING
RATE INCOME FUND
FIRST TRUST/FOUR CORNERS SENIOR FLOATING
RATE INCOME FUND II
By: /s/ James A. Bowen
-------------------------------
Name: James A. Bowen
Title: President
Page 22 of 24
EXHIBIT A
APPLICATION PURSUANT TO
SECTION 6(C) OF THE
INVESTMENT COMPANY ACT OF 1940
FOR AN ORDER OF THE COMMISSION
The undersigned states that he has duly executed the attached Application, dated
May 22, 2009 for and on behalf of First Trust/Four Corners Senior Floating Rate
Income Fund and First Trust/Four Corners Senior Floating Rate Income Fund II,
that he is the President of each of the aforementioned investment companies, and
that all actions by the members and other bodies necessary to authorize the
undersigned to execute and file such instrument have been taken. The undersigned
further states that he is familiar with such instrument, and the contents
thereof, and that the facts therein set forth are true to the best of his
knowledge, information and belief.
/s/ James A. Bowen
-------------------------
Name: James A. Bowen
Title: President
Page 23 of 24
EXHIBIT B
AUTHORIZATION FOR THE APPLICANTS
WHEREAS, First Trust Advisors L.P. acts as investment adviser to the following
closed-end funds which have issued and currently have outstanding preferred
equity securities whose dividend rate is reset at regular intervals based on an
auction process ("Auction Preferred Shares"): First Trust/Four Corners Senior
Floating Rate Income Fund, First Trust/Four Corners Senior Floating Rate Income
Fund II, and First Trust Tax-Advantaged Preferred Income Fund (collectively, the
"Funds"); and
WHEREAS, Auction Preferred Shares of the Funds have experienced, or may
experience, unsuccessful auctions due to an imbalance between buy and sell
orders and, in light of the foregoing, one or more of the Funds may seek to
replace all or a portion of its respective Auction Preferred Shares with debt;
NOW THEREFORE BE IT RESOLVED, that James A. Bowen and any other appropriate
officer of each Fund be, and each hereby is, authorized to prepare, execute and
submit to the Securities and Exchange Commission, on behalf of the respective
Fund or Funds and in its or their name, an Application or Applications in such
form as such officers, or any one of them, deems necessary or appropriate
seeking an exemption from certain provisions of the Investment Company Act of
1940, as amended, including, in particular, the asset coverage requirements of
Section 18 thereof, to the extent necessary to, among other things, permit such
Fund or Funds to refinance all or a portion of its or their Auction Preferred
Shares; and further
RESOLVED, that James A. Bowen and any other appropriate officer of each Fund be,
and each hereby is, authorized and directed to take such additional actions and
to execute and deliver on behalf of the respective Fund or Funds such other
documents or instruments as he or she deems necessary or appropriate in
furtherance of the above resolution, including, without limitation, the
preparation, execution and filing of any necessary or appropriate amendment(s)
or supplement(s) to such Application(s), his or her authority therefore to be
conclusively evidenced by the taking of any such actions or the execution or
delivery of any such document; and further
RESOLVED, that upon issuance of an Order of Exemption by the Securities and
Exchange Commission in accordance with the terms and conditions of the
above-described Application(s), each such Fund is authorized to act in
accordance with the provisions of the Order of Exemption.
Page 24 of 24