As filed with the Securities and Exchange Commission on March 14, 2006

Securities Act File No. 33-_____
Investment Company Act File No. 811-_______

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

x

 

 

Pre-Effective Amendment No. _____

 

 

 

Post-Effective Amendment No. _____

 

 

 

and/or

 

 

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

x

Amendment No. ___

HIGHLAND FUNDS I
(Exact Name of Registrant as Specified in Charter)

c/o Highland Capital Management, L.P.

Two Galleria Tower

13455 Noel Road, Suite 800

Dallas, Texas 75240

(Address of Principal Executive Offices)

Registrant’s Telephone Number, including Area Code: 1- 972-628-4100

Mr. James D. Dondero

c/o Highland Capital Management, L.P.

Two Galleria Tower

13455 Noel Road, Suite 800

Dallas, Texas 75240

(Name and Address of Agent for Service)


Copies to:

 

Mr. R. Joseph Dougherty

Richard T. Prins, Esq.

c/o Highland Capital Management, L.P.

Skadden, Arps, Slate, Meagher & Flom LLP

Two Galleria Tower

Four Times Square, 30th Floor

13455 Noel Road, Suite 800

New York, New York 10036-6522

Dallas, Texas 75240

 

Approximate date of proposed public offering: As soon as practicable after the effective date of this Registration Statement.

Title of Securities Being Registered

 

Amount Being Registered

 

Common Shares of Beneficial Interest

 

Indefinite(1)


(1)

Registrant is registering an indefinite number of shares of its Common Stock, par value $.001 per share, under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940.

           

 

Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.



PROSPECTUS dated                      , 2006

HIGHLAND EQUITY OPPORTUNITIES FUND

Class A Shares and Class C Shares

Two Galleria Tower
13455 Noel Road, Suite 800
Dallas, Texas 75240
Telephone: (972) 628-4100
Facsimile: (972) 628-4147

An investment portfolio of Highland Funds I
managed by
Highland Capital Management, L.P.

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THE SHARES DESCRIBED IN THIS PROSPECTUS OR DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE.  ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.


TABLE OF CONTENTS

 

PAGE

 

Investment and Performance Summary

1

 

 

Fund Expenses

4

 

 

Investment and Risk Information

6

 

 

Management of the Fund

10

 

 

How to Buy Shares

13

 

 

Multiple Share Classes

16

 

 

Redemption of Shares

20

 

 

Exchange of Shares

24

 

 

Net Asset Value

25

 

 

Dividends and Distributions

26

 

 

Taxation

27

 

 

Mailings to Shareholders

29

i


INVESTMENT AND PERFORMANCE SUMMARY

Investment Objective

                    The investment objective of Highland Equity Opportunities Fund (the “Fund”) is to seek consistent, above-average total returns primarily through capital appreciation, while also attempting to preserve capital and mitigate risk through hedging activities. 

Principal Investment Strategies

                    The Fund, invests, under normal circumstances, at least 80% of the value of its “Assets” in equity securities.  “Assets” means net assets, plus the amount of any borrowings for investment purposes.  Equity securities of domestic or foreign issuers in which the Fund may invest includes common stocks, preferred stocks, convertible securities, depositary receipts, limited partnership interests and warrants to buy common stocks.  In addition, the Fund may invest up to 20% of the value of its Assets in a wide variety of other, non-equity securities and financial instruments, domestic or foreign, of all kinds and descriptions, including but not limited to, bonds and other debt securities, money market instruments, illiquid securities, cash and cash equivalents. 

                    Derivatives, which are instruments that have a value based on another instrument, exchange rate or index, may be used as substitutes for securities in which the Fund can invest.  The Fund may use derivatives, primarily options, as tools in the management of portfolio assets.  The Fund may use derivatives to hedge various investments, for risk management and for income enhancement.

                    The Fund is a non-diversified portfolio of securities that seeks to maximize return while controlling risk.  In the absence of a pooling vehicle such as the Fund, an investor would not ordinarily be able to achieve the same degree of diversification or monitor, evaluate and implement the same investment strategies as the Fund.

                    The Fund’s investment strategy utilizes the analytical models of Prospect Management Advisers L.P. (“Prospect” or the “Sub-Adviser”) to evaluate potential equity securities of companies of varying market capitalizations in an attempt to isolate those securities with the greatest potential for capital appreciation.  The Sub-Adviser also endeavors to be proactive and attempt to take advantage of temporary market inefficiencies in order to boost the overall performance of the Fund.  In addition to investing in common stock, the Fund’s investment strategy includes short selling, options, fixed-income securities, leverage, capital structure arbitrage and event-driven investments.


                    In summary, the Fund seeks to provide superior and sustainable returns combined with effective risk management.  Although the strategy and asset allocation utilized by the Fund is primarily centered on publicly-traded equity securities, the Sub-Adviser intends to follow a flexible approach in order to place the Fund in the best position to capitalize on opportunities in the financial markets.  Accordingly, the Sub-Adviser may take advantage of investment opportunities and may invest up to 20% of the value of its Assets in other asset classes if they meet the Sub-Adviser’s standards of investment merit.  See “Investment and Risk Information.”  When adverse market or economic conditions occur, however, the Fund may temporarily invest all or a portion of its assets in defensive investments.  Such investments include fixed income securities or high quality money market instruments.  When following a defensive strategy, the Fund will be less likely to achieve its investment goals.

                    The Fund’s Board of Trustees may change any of these investment policies, including its investment objective, without shareholder approval.

                    The Fund is non-diversified as defined in the Investment Company Act of 1940 (the “1940 Act”).  The Fund, however, is not intended to be a complete investment program.

Principal Risks

                    No assurance can be given that the Fund will achieve its objective, and investment results may vary substantially over time and from period to period.  The Fund’s share price will fluctuate with changes in the market value of the Fund’s portfolio securities.  Stocks are subject to market, economic and business risks that cause their prices to fluctuate.  Preferred stocks and debt securities convertible into, or exchangeable for, common or preferred stock also are subject to interest rate risk, credit risk or both.  When interest rates rise, the value of such securities generally declines.  It is also possible that the issuer of such security will not be able to make interest and principal payments when due.  When you sell Fund shares, they may be worth less than what you paid for them.  Consequently, you can lose money by investing in the Fund.  The Fund is also subject to the risk that the Sub-Adviser may be incorrect in its assessment of the value of the securities it holds, which may result in the decline in the value of Fund shares.  The practices of options trading, short selling, use of leverage and other investment techniques employed by the Fund can, in certain circumstances, maximize the adverse impact to which the Fund’s investment portfolio may be subject.

You may want to invest in the Fund if you:

 

•

are a long-term investor

 

 

 

 

•

are seeking above-average growth of capital as well as income, while also attempting to preserve principal and manage risk

2


You may not want to invest in the Fund if you:

 

•

are conservative in your investment approach

 

 

 

 

•

seek stability of principal more than growth of capital

 

 

 

 

•

intend to trade frequently in Fund shares

Risk/Return Bar Chart and Table

                    The Fund’s commencement of operations is expected to begin on or about the date of this Prospectus; therefore, the Fund currently has no investment performance information to report.   After the Fund has had operations for at least one calendar year, its prospectuses will include a bar chart and a table that will provide an indication of the risks of investing in the Fund by showing changes in the Fund’s performance from year to year and by showing how the Fund’s average annual returns for the most recent one year, five years and ten years (or the life of the Fund, if shorter), compared to those of the Standard & Poor’s Corporation (“S&P”) 500 Index.  The S&P 500 Index is S&P’s composite index of 500 stocks, a widely-recognized, unmanaged index of common stock prices in the United States.  As with all mutual funds, the Fund’s past performance (before and after taxes) will not predict how the Fund will perform in the future.  Both the chart and the table will assume the reinvestment of dividends and distributions.

3


FUND EXPENSES

The following tables are intended to assist investors in understanding the various costs and expenses directly or indirectly associated with investing in Class A and Class C Shares of the Fund.

 

 

Class A

 

Class C

 

 

 

 

 

SHAREHOLDER TRANSACTION EXPENSES (1)

 

 

 

 

 

 

 

Maximum Sales Charge Imposed (as a percentage of offering price)

 

 

5.50

%

 

None

 

Sales Charge Imposed on Reinvested Dividends

 

 

None

 

 

None

 

Contingent Deferred Sales Charge (“CDSC”)

 

 

1.00

%(2)

 

1.00

%(3)

Exchange Fee

 

 

None

 

 

None

 

Redemption fee

 

 

2.00

%

 

2.00

%

 

ESTIMATED ANNUAL EXPENSES (as a percentage of average net assets)

 

 

 

 

 

 

 

Management Fees (4)

 

 

2.45

%

 

2.45

%

Distribution and Service (12b-1) Fees

 

 

0.35

%

 

1.00

%

Other Expenses (5)

 

 

[__

]%

 

[__

]%

 

 

 

 

Total Annual Expenses (6)

 

 

[__

]%

 

[__

]%

Fee Waivers and Reimbursements

 

 

[__

]%

 

[__

]%

 

 

 

 

Net Expenses

 

 

2.60

%

 

2.60

%


(1)

Financial advisors (defined in “How to Buy Shares”) may independently charge additional fees for shareholder transactions or for advisory services.  Please see their materials for details.

 

 

(2)

Class A shares bought without an initial sales charge in accounts aggregating $1 million or more are subject to a 1.00% CDSC if the shares are sold within 18 months from each purchase.  The 18-month period begins on the day on which the purchase was made.

 

 

(3)

The CDSC is 1.00% within the first year after each purchase.  There is no CDSC thereafter.

 

 

(4)

Management fees include both investment advisory fees and administration fees charged to the Fund.  Highland receives from the Fund monthly advisory fees, computed and accrued daily, at the annual rate of 2.25% of the Fund’s average daily managed assets.  Highland also receives from the Fund monthly administration fees, computed and accrued daily, at the annual rate of 0.20% of the Fund’s average daily net assets.

 

 

(5)

“Other Expenses” are based on estimated amounts for the current fiscal year.

 

 

(6)

Pursuant to a written agreement, Highland has agreed to waive its advisory and/or administration fees and reimburse the Fund for certain expenses (exclusive of distribution and service fees, brokerage

4


 

commissions, short sale dividend expense, taxes , deferred organization expenses and extraordinary expenses, if any) so that total annual expenses will not exceed 2.60%for each of Class A Shares and Class C Shares, of their average daily net assets for the Fund’s first year of operations.  Any such waiver or reimbursement will lower the particular class’s overall expense ratio and increase its overall return to investors.

                    Distribution and service fees include an asset-based sales charge.  As a result, if you hold your shares for a long period of time, you may pay more than the economic equivalent of the maximum front-end sales charges permitted by the National Association of Securities Dealers, Inc.

EXPENSE EXAMPLE.  This Example helps you compare the cost of investing in the Fund to the cost of investing in other mutual funds.  The Example assumes that (i) you invest $10,000 in the Fund, (ii) your investment has a 5% return each year, (iii) operating expenses remain the same, and (iv) all income dividends and capital gains distributions are reinvested in additional shares.  The Example should not be considered a representation of future expenses.  Your actual costs may be higher or lower.

CLASS

 

1 YEAR

 

3 YEARS

 

 

 

 

Class A 1 :

 

 

$

[_____

]

$

[______

]

Class C:

did not sell your shares

 

$

[_____

]

$

[______

]

 

sold all your shares at the end of the period 2

 

$

[_____

]

$

[______

]


1

Assumes sales charge is deducted when shares are purchased.

 

 

2

Assumes applicable CDSC is deducted when shares are sold.

5


INVESTMENT AND RISK INFORMATION

Investment Objective

                    The Fund’s investment objective is to seek consistent, above-average total returns primarily through capital appreciation, while also attempting to preserve capital and mitigate risk through hedging activities. 

Investment Strategies

Long Equity .  The Sub-Adviser expects a majority of the Fund’s investments will generally be in common stock.  The Fund’s focus will be on companies of varying size that have a reasonable expectation of producing above average returns.  The Sub-Adviser favors companies that are actively traded in the United States, but is willing to invest in companies without respect to market capitalization, geographic location or market sector.  In addition, the Sub-Adviser believes that in order to sustain superior investment results, it is necessary to concentrate the Fund’s portfolio from time to time in investments that will produce high absolute returns while at the same time reducing risk to the overall portfolio.   Thus, the Fund may have limited diversification.

The Sub-Adviser will analyze certain financial measures before investing in a company, such as the company’s historical and expected cash flows, its projected earnings growth, its valuation relative to its growth and to that of its industry, the historical trading patterns of the company’s securities, and forecasts and projections for the relevant industry group.  The Sub-Adviser will at times gather information about a company from consultants, analysts, competitors, suppliers and customers that may help the effectiveness of the analysis performed.

Short Selling .  The Sub-Adviser may short individual stocks as a means of attempting to reduce risk and increase performance.  Stocks are shorted for a variety of reasons including: (i) temporary overvaluation due to short-term market euphoria for a sector; (ii) faulty business model; (iii) poor earnings; (iv) questionable accounting practices; (v) deteriorating fundamentals; and (vi) weak management unable to adapt to changes in technology, regulation or the competitive environment.  Technical analysis may also be used to help in the decision making process.  The Sub-Adviser believes that by focusing on specific companies that are experiencing any one or more of these elements, the Sub-Adviser should be able to identify profitable short sale candidates in most stock market environments.

6


Investment Process

Investment Identification .  The Sub-Adviser will use two primary methods of identifying potential investments.  The first method will involve independent sorting and research of financial and corporate documents filed with the Securities and Exchange Commission (“SEC”), as well as general and financial news, through the use of third-party research databases, news services and screening software.  The second method will rely on the professional relationships that the Sub-Adviser has established with money managers, leveraged buyout and private equity investors, investment bankers, research analysts, securities traders, brokers, corporate managers, corporate attorneys and accountants.

The Sub-Adviser’s investment decisions will take into consideration its view of macroeconomic conditions and industry trends, and will be based on the Sub-Adviser’s analysis of a security’s relative value.  It is contemplated that investments will be made without regard to a company’s level of capitalization or the tax consequences of the investment (short or long-term capital gains).

Portfolio Evaluation .  Once an investment opportunity is determined to be attractive as a stand-alone investment, the Sub-Adviser will evaluate the effect of adding that investment to the Fund’s portfolio.  In doing so, the Sub-Adviser will seek to minimize the market-related portfolio volatility as well as the risk of a capital loss.

Investment and Portfolio Monitoring .  The Sub-Adviser will continually monitor the Fund’s positions to ensure that the investment thesis behind each is intact.  The Sub-Adviser will also monitor trading prices so that profits can be taken as trading and intrinsic values converge or losses can be minimized in the event of a significant shift in an investment’s fundamental premise.  The Sub-Adviser will further monitor investment positions in view of the portfolio as a whole in order to manage risk.

                    The investment policy of the Fund requiring it to invest at least 80% of the value of its Assets in equity securities may be changed by the Board of Trustees without shareholder approval.  Shareholders, however, will receive at least 60 days’ prior notice of any change in this policy.

                    In selecting investments for the Fund, the Sub-Adviser focuses on issuers that:

 

•

have strong, free cash flow and pay regular dividends

 

 

 

 

•

have potential for long-term earnings per share growth

 

 

 

 

•

may be subject to a value catalyst, such as industry developments, regulatory changes, changes in management, sale or spin-off of a division or the development of a profitable new business

7


 

•

are well-managed

 

 

 

 

•

will benefit from sustainable long-term economic dynamics, such as globalization of an issuer’s industry or an issuer’s increased focus on productivity or enhancement of services.

                    The Sub-Adviser also believes preferred stock and convertible securities of selected companies offer opportunities for capital appreciation as well as periodic income and may invest a portion of the Fund’s assets in such securities.  This is particularly true in the case of companies that have performed below expectations.  If a company’s performance has been poor enough, its preferred stock and convertible debt securities will trade more like the common stock than like a fixed income security and may result in above average appreciation if performance improves.  Even if the credit quality of the company is not in question, the market price of the convertible security will reflect little or no element of conversion value if the price of its common stock has fallen substantially below the conversion price.  This leads to the possibility of capital appreciation if the price of the common stock recovers.

                    The Fund emphasizes value.  The Fund will generally take long positions in equity securities that the Sub-Adviser believes are undervalued and short positions in equity securities that the Sub-Adviser believes are overvalued.

                    Investing in the Fund involves the following risks:

Frequency of Trading .  Some of the strategies and techniques to be employed by the Sub-Adviser may require frequent trades to take place.  As a result, the higher the Fund’s portfolio turnover than that for other investment entities of similar size, the higher its capital gains taxes and brokerage commissions.  The frequency of the Fund’s trading will vary from year to year, depending on market conditions.

Concentration of Investments .  Due to the nature of the Fund’s investment strategy, it is possible that a material amount of the Fund’s equity could be invested in the securities of only a few companies.  The concentration of the Fund’s portfolio in any one issuer or industry would subject the Fund to a greater degree of risk with respect to the failure of one or a few issuers or with respect to economic downturns in relation to such industry. 

Hedging Transactions .  Hedging strategies in general are usually intended to limit or reduce investment risk, but can also be expected to limit or reduce the potential for profit.  No assurance can be given that any particular hedging strategy will be successful.

Market Volatility .  The profitability of the Fund substantially depends upon the Sub-Adviser’s correctly assessing the future price movements of stocks, bonds, options on stocks, and other securities and the movements of interest rates.  The Sub-Adviser cannot guarantee that it will be successful in accurately predicting price and interest rate movements.

8


The Fund’s Investment Activities .  The Fund’s investment activities involve a significant degree of risk.  The performance of any investment is subject to numerous factors that are neither within the control of, nor predictable by, the Sub-Adviser.  Such factors include a wide range of economic, political, competitive and other conditions that may affect investments in general or specific industries or companies.  In recent years, the securities markets have become increasingly volatile, which may adversely affect the ability of the Fund to realize profits.  As a result of the nature of the Fund’s investment activities, it is possible that the Fund’s financial performance may fluctuate substantially from period to period.

Counterparty Creditworthiness .  The Fund intends to engage in transactions in securities and financial instruments, such as repurchase agreements, that involve counterparties.  Under certain conditions, a counterparty to a transaction could default or the market for certain securities and/or financial instruments may become illiquid.

Portfolio Holdings

                    A description of the Fund’s policies and procedures with respect to the disclosure of the Fund’s portfolio securities is available (i) in the Fund’s Statement of Additional Information (“SAI”) and (ii) on the Fund’s website:  http://www.highlandfunds.com.

9


MANAGEMENT OF THE FUND

Board of Trustees and Investment Adviser

                    The Board of Trustees of the Fund has overall management responsibility for the Fund.  See “Management” in the SAI for the names of and other information about the Trustees and officers of the Fund.  Highland Capital Management, L.P., 13455 Noel Road, Suite 800, Dallas, Texas 75240 (“Highland”), serves as the investment adviser to the Fund.  The Fund and Highland have entered into an Investment Advisory Agreement pursuant to which Highland is responsible for the ongoing monitoring of the Fund’s investment portfolio and oversees the activities of the Fund’s Sub-Adviser, and in that connection Highland furnishes offices, necessary facilities and equipment, personnel and pays the compensation of the Trustee of the Fund who is its affiliate.  Highland receives from the Fund monthly advisory fees, computed and accrued daily, at the annual rate of 2.25% of the Fund’s “Average Daily Managed Assets.”  “Average Daily Managed Assets” of the Fund shall mean the average daily value of the total assets of the Fund, less all accrued liabilities of the Fund (other than the aggregate amount of any outstanding borrowings constituting financial leverage).  The agreement with the Adviser can be terminated on 60 days’ written notice. 

                    Organized in March 1993, Highland is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (“Advisers Act”).  As of January 31, 2006, Highland had approximately $22 billion in assets under management, approximately $800 million of which consisted of equity securities.  Highland is also the Fund’s Administrator (see “Administrator/Sub-Administrator” in the SAI for details).  Highland is controlled by James Dondero and Mark Okada, by virtue of their respective share ownership, and its general partner, Strand Advisors, Inc., of which Mr. Dondero is the sole stockholder.

Sub-Adviser

                    Prospect Management Advisers, L.P., 13455 Noel Road, Suite 1300, Dallas, Texas 75240 (“Prospect” or “Sub-Adviser”), a wholly-owned subsidiary of Highland, has entered into a Sub-Advisory Agreement with Highland, on behalf of the Fund.  Pursuant to the Sub-Advisory Agreement, Prospect will provide the day-to-day management of the Fund’s portfolio of securities, which includes buying and selling securities for the Fund and investment research.  The Sub-Adviser also provides personnel to the Fund.

                    For such services the Sub-Advisory Agreement provides that the fee paid by the Adviser to the Sub-Adviser will consist of two components:  (1)  a base fee of 1.00% of the Fund’s average daily net assets during the previous month  (“Base Fee”),

10


plus or minus (2)  a performance-fee adjustment (“Performance Adjustment”) calculated monthly by applying a variable rate of up to a maximum of 0.15% (positive or negative) to the Fund’s average daily net assets during the applicable performance measurement period.  The performance measurement period generally will be a rolling 18-month period, although no Performance Adjustment will be made until the Fund has been operational for at least 12 months, and accordingly, only the Base Fee rate will apply for the initial 12 months.  Once the Fund has been operational for at least 12 months, but less than 18 months, the performance measurement period will be equal to the time that has elapsed since the Fund’s commencement of operations.

                    The Performance Adjustment may result in an increase or decrease in the sub-advisory fee paid by Highland, depending upon the investment performance of the Fund relative to its benchmark index, the S&P 500 Index (the “Index”), over the performance measurement period.  No Performance Adjustment will be applied unless the difference between the Fund’s investment performance and the investment record of the S&P 500 Index is 1.00% or greater (positive or negative) during the applicable performance measurement period.  If during the applicable performance measurement period the Fund’s investment performance were:

 

(i)

at least 1.00% (but less than 2.50%) greater (positive or negative) than the investment record of the Index, then the Performance Adjustment would be 0.05% (positive or negative, respectively);

 

 

 

 

(ii)

at least 2.50% (but less than 4.50%) greater (positive or negative) than the investment record of  the Index, then the Performance Adjustment would be 0.10% (positive or negative, respectively); or

 

 

 

 

(iii)

at least 4.50% greater (positive or negative) than the investment record of the Index, then the Performance Adjustment would be 0.15%  (positive or negative, respectively).

                    Performance of the Fund is calculated net of expenses; whereas, the S&P 500 Index does not have any fees or expenses.  Reinvestments of dividends and distributions are included in calculating both the performance of the Fund and the S&P 500 Index.

                    The investment performance of Class Z Shares of the Fund will be used for purposes of calculating the Fund’s Performance Adjustment.  After Highland determines whether the Fund’s performance was above or below the S&P 500 Index by comparing the investment performance of the Class Z Shares of the Fund against the investment record of the S&P 500 Index, Highland will apply the same Performance Adjustment (positive or negative) across each other class of shares of the Fund.

11


                    In addition, Highland and Prospect have entered into a waiver agreement pursuant to which Prospect has agreed to waive 0.50% of its fee determined pursuant to the Sub-Advisory Agreement.  This agreement shall remain in effect until terminated by Highland.

                    Prospect was organized in November 2004 and is registered as an investment adviser under the Advisers Act.  As of December 31, 2005, Prospect had approximately $ 21.8 million under management, 100% of which consisted of equity securities.

Portfolio Management Team

                    The Fund’s portfolio is managed by a portfolio management team.  The SAI provides additional information about the portfolio management team, including compensation structure, other accounts the team manages and ownership of Fund shares.

Distributor

                    Fund shares are offered for sale through PFPC Distributors, Inc. (the “Distributor”), 760 Moore Road, King of Prussia, Pennsylvania 19406.

12


HOW TO BUY SHARES

                    You can purchase shares of the Fund on any day that the New York Stock Exchange (“NYSE”) is open for business (see “Net Asset Value”).  Your financial advisor, broker or other financial intermediary (“financial advisor”) can help you establish an appropriate investment portfolio, buy shares, and monitor your investments.  When the Fund receives your purchase request in “good form,” it will accept your order and your shares will be bought at the next calculated net asset value (“NAV”).  “Good form” means that you placed your order with your financial advisor or your payment (in accordance with any of the methods set forth in the table below) has been received and your application is complete, including all necessary signatures.  The Fund has authorized one or more financial advisors to receive on its behalf purchase and redemption orders.  These financial advisors are authorized to designate other intermediaries to receive purchase and redemption orders on the Fund’s behalf.  The Fund will be deemed to have received a purchase or redemption order when an authorized financial advisor or its authorized designee receives the order.  Customer orders will be priced at the Fund’s NAV next computed after they are received by an authorized financial advisor or its authorized designee and accepted by the Fund.  Investors may be charged a fee if they effect a transaction in Fund shares through either a financial advisor or its authorized designee.

                    The USA Patriot Act may require the Fund, an authorized financial advisor or its authorized designee to obtain certain personal information from you, which will be used to verify your identity.  If you do not provide the information, it may not be possible to open your account.  If the Fund, authorized financial advisor or authorized designee is unable to verify your customer information, it reserves the right to close your account or to take such other steps as it deems reasonable.  Outlined below are various methods for buying shares:

Method

 

Instructions

 

Through your financial advisor

 

Your financial advisor can help you establish your account and buy Fund shares on your behalf.  To receive the current trading day’s price, your financial advisor must receive your request prior to the close of regular trading on the NYSE, usually 4:00 p.m.  Eastern time.  Your financial advisor may charge you fees for executing the purchase for you.

13


Method

 

Instructions

 

By check* (new account)

 

For new accounts, send to the Fund, c/o the Transfer Agent, PFPC Inc., at the address noted below,** a completed application and check made payable to “Highland Equity Opportunities Fund.”

 

 

 

By check* (existing account)

 

For existing accounts, fill out and return to the Fund, c/o the Transfer Agent, PFPC Inc., at the address noted below,** the additional investment stub included in your account statement, or send a letter of instruction, including the Fund name and account number, with a check made payable to “Highland Equity Opportunities Fund.”

 

 

 

By exchange

 

You or your financial advisor may acquire shares of the Fund for your account by exchanging shares you own in other Highland funds for shares of the same class of the Fund at no additional cost (see “Exchange of Shares”).  To exchange, send written instructions to the Fund, c/o the Transfer Agent, PFPC Inc., at the address noted below** or call (877) 665-1287.

 

 

 

By wire

 

You may purchase shares of the Fund by wiring money from your bank account to your Fund account.  Send funds by wire to:

 

 

 

 

 

PNC Bank, N.A.

 

 

Philadelphia, PA

 

 

ABA #031-0000-53

 

 

FFFC #8615597735

 

 

 

 

 

Highland Funds

 

 

FBO:  ([Name of] Fund/[Your]Account number)

 

 

 

 

 

If your initial purchase of shares is by wire, you must complete a new account application and promptly mail it to the Fund, c/o the Transfer Agent, PFPC Inc., at the address noted below.** After completing a new account application, please call (877) 665-1287 to obtain your account number.  Please include your account number on the wire.


*

The redemption of shares purchased by check or an automated clearing house (“ACH”) transaction is subject to certain limitations (see “Redemption of Shares”).  Any purchase by check or ACH that does not clear may be cancelled, and the investor will be responsible for any expenses and losses to the Fund.

 

 

14


**

Regular Mail: Send to the Fund, c/o PFPC Inc., P.O. Box 9840, Providence, RI 02940
Overnight Mail: Send to the Fund, c/o PFPC Inc., 101 Sabin Street, Pawtucket, RI 02860

 

 


By electronic funds transfer via automated clearing house (ACH)*

 

You may purchase shares of the Fund by electronically transferring money from your bank account to your Fund account by calling (877) 665-1287.  An electronic funds transfer may take up to two banking days to settle and be considered in “good form.” You must set up this feature prior to your telephone request.  Be sure to complete the appropriate section of the application.

 

 

 

Automatic Investment Plan

 

You may make monthly or quarterly investments automatically from your bank account to your Fund account.  You may select a pre-authorized amount to be sent via electronic funds transfer.  For this feature, please call the Fund at (877) 665-1287 or visit the Fund’s website (http://www.highlandfunds.com).


*

Regular Mail: Send to the Fund, c/o PFPC Inc., P.O. Box 9840, Providence, RI 02940
Overnight Mail: Send to the Fund, c/o PFPC Inc., 101 Sabin Street, Pawtucket, RI 02860

 

 

**

The redemption of shares purchased by check or an automated clearing house (“ACH”) transaction is subject to certain limitations (see “Redemption of Shares”).  Any purchase by check or ACH that does not clear may be cancelled, and the investor will be responsible for any expenses and losses to the Fund.


Investment Minimums

 

 

 

 

 

 

 

 

Initial Investment

 

$

5,000

 

Subsequent Investments

 

$

1,000

 

Automatic Investment Plan

 

$

200

 

Retirement Plans

 

$

25

 

                    The Fund reserves the right to change the investment minimums.  The Fund also reserves the right to refuse a purchase order for any reason, including if it believes that doing so would be in the best interests of the Fund and its shareholders.

15


MULTIPLE SHARE CLASSES

Choosing a Share Class

                    The Fund offers two classes of shares in this Prospectus — Class A and Class C.  Each share class has its own sales charge and expense structure.  Determining which share class is best for you depends on the dollar amount you are investing and the number of years for which you are willing to invest.  Purchases of $1 million or more can be made only in Class A Shares.  Based on your personal situation, your financial advisor can help you decide which class of shares makes the most sense for you.  The Fund also offers exclusively to certain institutional and other eligible investors an additional class of shares, Class Z Shares, which are made available through a separate prospectus.

Sales Charges

                    You may be subject to an initial sales charge when you purchase shares or a CDSC when you redeem your shares.  These sales charges are described below.  In certain circumstances, the sales charges may be waived, as described below and in the SAI.

Class A Shares

                    Your purchases of Class A Shares are made at the public offering price for these shares, that is the NAV per share for Class A plus a sales charge that is based on the amount of your initial investment when you open your account.  The sales charge you pay on an additional investment is based on the total amount of your additional purchase and the current value of your account.  Shares you purchase with reinvested dividends or other distributions are not subject to a sales charge.  A portion of the sales charge is paid as a commission to your financial advisor on the sale of Class A Shares.  The amount of the sales charge, if any, differs depending on the amount you invest as shown in the table below.

Amount Invested

 

As a % of
the Public
Offering Price

 

As a % of
Your Net
Investment

 

% of
Offering
Price Paid to
Financial Advisor

 

 

 

 

 

Less than $50,000

 

 

5.50

 

 

5.82

 

 

4.75

 

$50,000 to $99,999

 

 

4.25

 

 

4.44

 

 

3.50

 

$100,000 to $249,999

 

 

3.25

 

 

3.36

 

 

2.50

 

$250,000 to $499,999

 

 

2.25

 

 

2.30

 

 

1.75

 

$500,000 to $999,999

 

 

1.75

 

 

1.78

 

 

1.50

 

Greater than $1,000,000

 

 

none

 

 

none

 

 

0.75

 

16


*

Class A shares bought without an initial sales charge in accounts aggregating $1 million or more at the time of purchase are subject to a 1.00% CDSC if the shares are sold within 18 months of purchase.  Subsequent Class A Share purchases that bring your account value above $1 million are subject to a CDSC if redeemed within 18 months of purchase.  The 18-month period begins on the day the purchase was made.  The CDSC does not apply to retirement plans purchased through a fee-based program.

                    For Class A Share purchases of $l million or more, financial advisors receive a cumulative commission from the Distributor as follows:

Amount Purchased

 

 

Commission %

 

 

 

Less than $3 million

 

 

1.00

%

$3 million to less than $5 million

 

 

0.80

%

$5 million to less than $25 million

 

 

0.50

%

$25 million or more

 

 

.25

%

                    For Class A share purchases by participants in certain group retirement plans offered through a fee-based program, financial advisors receive a 1.00% commission from the Distributor on all purchases of less than $3 million.

Reduced Class A Sales Charges for Larger Investments

                    You may pay a lower sales charge when purchasing Class A shares through Rights of Accumulation , which privilege works as follows:  if the combined value of the Fund accounts in all classes and shares of the Money Market Fund, acquired by exchange from Class A Shares of the Fund, maintained by you, your spouse or your minor children, together with the value of your current purchase, reaches a sales charge discount level (according to the above chart), your current purchase will receive the lower sales charge, provided that you have notified the Distributor and your financial advisor in writing of the identity of such other accounts and your relationship to the other account holders.  Such reduced sales charge will be applied upon confirmation of the shareholder’s holdings by the Transfer Agent.  The Fund may terminate or amend this Right of Accumulation.

                    You may also pay a lower sales charge when purchasing Class A shares by signing a Letter of Intent within 90 days of your purchase.  By doing so, you would be able to pay the lower sales charge on all purchases by agreeing to invest a total of at least $100,000 within 13 months.  If your Letter of Intent purchases are not completed within 13 months, you will be charged the applicable sales charge on the amount you had

17


invested to that date.  Upon request, a Letter of Intent may reflect purchases within the previous 90 days.  See the SAI for additional information about this privilege.  In addition, certain other investors may purchase shares at a reduced sales charge or NAV, which is the value of a Fund share excluding any sales charges.  See the SAI for a description of these situations.

Class C Shares

                    Your purchases of Class C Shares are at Class C’s NAV.  Although Class C Shares have no front-end sales charge, they carry a CDSC of 1.00% that is applied to shares sold within the first year after they are purchased.  After holding shares for one year, you may sell them at any time without paying a CDSC.  The Distributor pays your financial advisor an up-front commission of 1.00% on sales of Class C Shares.

Distribution and Service Fees

                    In addition to a CDSC, each class of shares is authorized under a distribution plan (“Plan”) to use the assets attributable to a class to finance certain activities relating to the distribution of shares to investors.  These include marketing and other activities to support the distribution of the Class A and C Shares and the services provided to you by your financial advisor.  The Plan operates in a manner consistent with Rule 12b-1 under the 1940 Act, which regulates the manner in which an open-end investment company may directly or indirectly bear the expenses of distributing its shares.

                    Under the Plan, distribution and service fees paid by the Fund to the Distributor may equal up to an annual rate of 0.35% of average daily net assets attributable to Class A Shares and 1.00% of average daily net assets attributable to Class C Shares.  The Distributor may pay all or a portion of these fees to financial advisors whose clients own shares of the Fund.  Since the distribution and service fees are payable regardless of the Distributor’s expenses, the Distributor may realize a profit from the fees.  The Plan authorizes any other payments by the Fund to the Distributor and its affiliates to the extent that such payments might be construed to be indirect financing of the distribution of Fund shares.  In addition, Highland may, from time to time, at its expense out of its own financial resources, and/or the Distributor may, from time to time, out of any amounts received from the Fund pursuant to the Plan, make cash payments to dealer firms as an incentive to sell shares of the Fund and/or to promote retention of their customers’ assets in the Fund.  Such cash payments may be calculated on sales of shares of the Fund (“Sales-Based Payments”) or on the average daily net assets of the Fund attributable to that particular dealer (“Asset-Based Payments”).  Each of the Distributor and/or Highland may agree to make such cash payments to a dealer firm in the form of either or both Sales-Based Payments and Asset-Based Payments.  The Distributor and/or Highland may also make other cash payments to dealer firms in addition to or in lieu of Sales-Based Payments and Asset-Based Payments, in the form of payment for travel expenses, including lodging, incurred in connection with trips taken by qualifying

18


registered representatives of those dealer firms and their families to places within or outside the United States; meeting fees; entertainment; transaction processing and transmission charges; advertising or other promotional expenses; or other expenses as determined in the Distributor’s or Highland’s discretion, as applicable.  In certain cases these other payments could be significant to the dealer firms.  Any payments described above will not change the price paid by investors for the purchase of the Fund’s shares or the amount that the Fund will receive as proceeds from such sales.  Each of the Distributor and/or Highland determines the cash payments described above in its discretion in response to requests from dealer firms, based on factors it deems relevant. Dealers may not use sales of the Fund’s shares to qualify for any incentives to the extent that such incentives may be prohibited by law.  Amounts paid by Highland to any dealer firm in connection with the distribution of any Fund shares will count towards the maximum imposed by the National Association of Securities Dealers, Inc. on underwriter compensation in connection with the public offering of securities.

                    The Trustees believe that the Plan could be a significant factor in the growth and retention of Fund assets resulting in a more advantageous expense ratio and increased investment flexibility which could benefit each class of Fund shareholders.  The Plan will continue in effect from year to year so long as continuance is specifically approved at least annually by a vote of the Trustees, including the Trustees who are not “interested persons” (as defined in the 1940 Act) of the Fund and who have no direct or indirect financial interest in the operation of the Plan or in any agreements related to the Plan (“Independent Trustees”), cast in person at a meeting called for the purpose of voting on the Plan.  The Plan may not be amended to increase the fee materially without approval by a vote of a majority of the outstanding voting securities of the relevant class of shares, and all material amendments of the Plan must be approved by the Trustees in the manner provided in the foregoing sentence.  The Plan may be terminated with respect to a class at any time by a vote of a majority of the Independent Trustees or by a vote of a majority of the outstanding voting securities of the relevant class of shares.  The continuance of the Plan will only be effective if the selection and nomination of the Independent Trustees is effected by such Independent Trustees.

Contingent Deferred Sales Charges (“CDSCs”)

                    As described above, certain investments in Class A and C Shares are subject to a CDSC.  You will pay the CDSC only on shares you redeem within the prescribed amount of time after purchase.  The CDSC is applied to the NAV at the time of purchase or redemption, whichever is lower.  For purposes of calculating the CDSC, the start of the holding period is the day on which the purchase was made.  Shares you purchase with reinvested dividends or capital gains are not subject to a CDSC.  When shares are redeemed, the Fund will automatically redeem those shares not subject to a CDSC and then those you have held the longest.  This policy helps reduce and possibly eliminate the potential impact of the CDSC.  In certain circumstances, CDSCs may be waived, as described in the SA1.

19


REDEMPTION OF SHARES

                    You can redeem shares of the Fund on any day that the NYSE is open for business.  The Fund, however, may temporarily stop redeeming its shares when trading on the NYSE is restricted, when an emergency exists and the Fund cannot sell its shares or accurately determine the value of its assets, or if the SEC orders the Fund to suspend redemptions.

                    The Fund redeems its shares based on the net asset value next determined after the Fund receives your redemption request in proper form.  See “Net Asset Value” for a description of the calculation of net asset value.

                    The Fund is intended for long-term investors and not for those who wish to trade frequently in Fund shares.  The Fund believes that excessive short-term trading of Fund shares, such as by traders seeking short-term profits from market momentum, time zone arbitrage and other timing strategies, creates risks for the Fund and its long-term shareholders, including interference with efficient portfolio management, increased administrative and brokerage costs and potential dilution in the value of shares.

                    In order to discourage frequent short-term trading in Fund shares, the Fund has adopted policies and procedures that impose a 2.00% redemption fee (short-term trading fee) on Class A Shares and Class C Shares that are redeemed or exchanged within two months or less after the date of a purchase.  This fee is calculated based on the shares’ aggregate net asset value on the date of redemption and deducted from the redemption proceeds.  The redemption fee is not a sales charge, is retained by the Fund, and does not benefit the Fund’s Adviser, Distributor or any other third party.  For purposes of computing the redemption fee, shares will be redeemed in reverse order of purchase (the latest shares acquired will be redeemed first).  Redemptions to which the fee applies include redemption of shares resulting from an exchange made pursuant to the Fund’s exchange privilege.  The redemption fee will not apply to redemptions of shares where (i) the shares were purchased through automatic reinvestment of dividends or other distributions, (ii) the redemption is initiated by the Fund, (iii) shares were purchased through programs that collect the redemption fee at the program level and remit them to the Fund, (iv) shares were purchased through programs that the Adviser determines to have appropriate anti-short-term trading polices in place or as to which the Adviser has received assurances that look-through redemption fee procedures or effective anti-short term trading policies and procedures will be in place or (v) shares were purchased through certain qualified and non-qualified retirement plans if recordkeepers for retirement plan participants cannot implement redemption fees because of systems limitation and such recordkeepers have provided verification to that effect.  Such recordkeepers may be permitted to delay, temporarily, the implementation of redemption

20


fees.  These programs include programs utilizing omnibus accounts.  The Fund seeks to apply these policies uniformly.

                    Any shareholder purchasing shares of the Fund through a financial advisor should check with the financial advisor or the Fund to determine whether the shares will be subject to the redemption fee.

                    The Fund continues to reserve all rights, including the right to refuse any purchase request (including requests to purchase by exchange) from any person or group who, in the Fund’s view, is likely to engage in excessive trading or if such purchase is not in the best interests of the Fund and to limit, delay or impose other conditions on exchanges or purchases.  The Fund has adopted a policy of seeking to minimize short-term trading in its shares and monitors purchase and redemption activities to assist in minimizing short-term trading.

                    You may redeem shares through the Distributor or directly from the Fund through the Fund’s transfer agent.  Outlined below are various methods for redeeming shares:

Method

 

Instructions

 

By letter

 

You may mail a letter requesting redemption of shares to:

 

 

Highland Equity Opportunities Fund, c/o PFPC Inc., P.O. Box 9840, Providence, RI 02940. Your letter should state the name of the Fund and the share class, the dollar amount or number of shares you are redeeming and your account number.  You must sign the letter in exactly the same way the account is registered.  If there is more than one owner of shares, all must sign.  A signature guarantee is required for each signature on your redemption letter.  You can obtain a signature guarantee from financial institutions, such as commercial banks, brokers, dealers and savings associations.  A notary public cannot provide a signature guarantee.

 

 

 

By telephone or the Internet

 

Unless you have requested that telephone or Internet  redemptions  from your account not be permitted, you may redeem your shares in an account (including an IRA) directly registered with PFPC, Inc. by

21


Method

 

Instructions

 

 

 

calling 877-665-1287or visiting our website at www.highlandfunds.com.  IRA shareholders should consult a tax advisor concerning the current tax rules applicable to IRAs.  If PFPC, Inc. acts on telephone or Internet instructions after following reasonable procedures to protect against unauthorized transactions, neither PFPC, Inc. nor the Fund will be responsible for any losses due to unauthorized telephone or Internet transactions and instead you would be responsible.  You may request that proceeds from telephone or Internet redemptions be mailed to you by check (if your address has not changed in the prior 30 days), forwarded to you by bank wire or invested in another investment company advised by the Adviser or participating in the Fund’s exchange privilege (see “Exchange of Shares”).  Among the procedures PFPC, Inc. may use are passwords or verification of personal information.  The Fund may impose limitations from time to time on telephone or Internet redemptions.

 

 

 

          •     proceeds by check

 

The Fund will make checks payable to the name in which the account is registered and normally will mail the check to the address of record within seven days.

 

 

 

          •     proceeds by bank wire

 

The Fund accepts telephone or Internet requests for wire redemption in amounts of at least $1,000. The Fund will send a wire to either a bank designated on your new account application or on a subsequent letter with a guaranteed signature.  The proceeds are normally wired on the next business day.

22


Automatic Cash Withdrawal Plan

                    You may automatically redeem shares on a monthly basis if you have at least $10,000 in your account and if your account is directly registered with PFPC, Inc.  Call 877-665-1287 for more information about this plan.

Involuntary Redemption

                    The Fund may redeem all shares in your account (other than an IRA) if their aggregate value falls below $5,000 as a result of redemptions (but not as a result of a decline in net asset value).  You will be notified in writing if the Fund initiates such action and allowed 30 days to increase the value of your account to at least $5,000.

Redemption Proceeds

                    A redemption request received by the Fund will be effected at the net asset value next determined after the Fund receives the request.  If you request redemption proceeds by check, the Fund will normally mail the check to you within seven days after receipt of your redemption request.  If, however, you purchased your Fund shares by check or ACH transaction and unless you have documentation satisfactory to the Fund that your transaction has cleared, the Fund may hold proceeds for shares purchased by check or ACH until the purchase amount has been deemed collected, which is eight business days for checks and five business days for ACH transactions.  While the Fund will delay the processing of the payment until the check clears, your shares will be valued at the next determined NAV after receipt of your redemption request.

                    The Fund may pay your redemption proceeds wholly or partially in portfolio securities.  Payments would be made in portfolio securities only in the rare instance that the Board of Trustees believes that it would be in the Fund’s best interests not to pay redemption proceeds in cash.

23


EXCHANGE OF SHARES

                    Shareholders of the Fund may exchange their shares for shares of the same share class of Highland Floating Rate Fund or Highland Floating Rate Advantage Fund (together, the “Floating Rate Funds”) at the applicable NAV, plus any applicable redemption fee (see “Redemption of Shares”).  Shareholders of the Floating Rate Funds may exchange their shares for shares of the same class of the Fund at the applicable NAV.  The Floating Rate Funds are each continuously offered closed-end funds and are limited to quarterly repurchases.  The minimum to open an account in the Floating Rate Funds is $2500 ($25 for individual retirement accounts) and the minimum subsequent investment is $50.  Call 877-665-1287 for the applicable Floating Rate Funds’ prospectus and read it carefully before investing.  You can also exchange your shares for shares of the RBB Money Market Fund (the “Money Market Fund”).  The minimum to open an account in the Money Market Fund is $1,000, and subsequent investments must be at least $100.  Call (877) 665-1287 for the Money Market Fund prospectus and read it carefully before investing. 

                    If the shares you are exchanging are subject to a CDSC, you will not be charged a CDSC upon the exchange.  However, when you sell the shares acquired through the exchange, the shares sold may be subject to a CDSC, depending upon when you originally purchased the shares you are exchanging.  The length of time you have owned your shares will be computed from the date of your original purchase and the applicable CDSC will be the CDSC of the original fund.  No CDSC is charged when you exchange your shares into the Money Market Fund; however, the applicable CDSC will be imposed when shares are redeemed from the Money Market Fund.  Upon redemption, the applicable CDSC will be calculated without regard to the time such shares were held in the Money Market Fund.  Your exchange privilege will be revoked if the exchange activity is considered excessive.  In addition, the Fund may reject any exchange request for any reason, including if it does not think that it is in the best interests of the Fund and/or its shareholders to accept the exchange.

                    Unless your account is part of a tax-deferred retirement plan, an exchange is a taxable event, and you may realize a gain or a loss for tax purposes (see “Taxation”).  The Fund may terminate your exchange privilege if the Adviser determines that your exchange activity is likely to impact adversely its ability to manage the Fund.  To exchange by telephone, call (877) 665-1287.  Please have your account and taxpayer identification number available when calling.

24


NET ASSET VALUE

                    The NAV per share of each of the Fund’s Class A Shares and Class C Shares is calculated on each day that the NYSE is open for business.  The NYSE is open Monday through Friday, but currently is scheduled to be closed on New Year’s Day, Dr. Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day and on the preceding Friday or subsequent Monday when a holiday falls on a Saturday or Sunday, respectively.

                    The NAV per share of each class of shares is determined as of the close of regular trading on the NYSE, normally 4:00 p.m., Eastern Time.  NAV per share is computed by dividing the value of the Fund’s net assets (i.e., the value of its securities and other assets less its liabilities, including expenses payable or accrued but excluding capital stock and surplus) attributable to the class of shares by the total number of shares of the class outstanding at the time the determination is made.  The price of a particular class of Fund shares for the purpose of purchase and redemption orders will be based upon the calculation of NAV per share next made after the purchase or redemption order is received in good form.

                    Portfolio securities for which market quotations are readily available are valued at their current market value.  Portfolio securities for which market quotations are not readily available are valued at fair value as determined in good faith pursuant to policies and procedures approved by the Fund’s Board of Trustees.  Debt securities that are not credit-impaired with remaining maturities of 60 days or less are generally valued at their amortized cost.  Pursuant to the Fund’s pricing procedures, securities for which market quotations are not readily available, and therefore are subject to being fair valued, may include securities that are subject to legal or contractual restrictions on resale, securities for which no or limited trading activity has occurred for a period of time, or securities that are otherwise deemed to be illiquid (i.e., securities that cannot be disposed of within seven days at approximately the price at which the security is currently priced by the Fund).  Market prices may also be deemed not to be readily available in circumstances when an event has occurred after the close of the principal foreign market on which a security trades, but before the time for determination of the Fund’s NAV that has affected, or is likely to affect, more than minimally the NAV per share of the Fund.  Currently, the Fund fair values securities traded primarily on markets that close prior to the time as of which the Fund’s NAV is calculated whenever the Fund concludes that occurrences after such closing times may have more than a minimal effect on the value of its portfolio.

25


                    When a market price is not readily available, a portfolio security is valued at its fair value, as determined in good faith under procedures established by the Board of Trustees.  In determining fair value, the Fund’s pricing procedures establish a process and methodology to be employed in attempting to ascertain, in good faith, fair value.  Fair value is defined as the amount for which assets could be sold in an orderly disposition over a reasonable period of time, taking into account the nature of the asset.  Fair value pricing, however, involves judgments that are inherently subjective and inexact, since fair valuation procedures are used only when it is not possible to be sure what value should be attributed to a particular asset or when an event will affect the market price of an asset and to what extent.  As a result, there can be no assurance that fair value pricing will reflect actual market value and it is possible that the fair value determined for a security will be materially different from the value that actually could be or is realized upon the sale of that asset.  The Board of Trustees will review the Adviser’s fair value determinations periodically.  The value of the Fund’s portfolio assets may change on days the Fund is closed and on which you are not able to purchase or sell your shares.

DIVIDENDS AND DISTRIBUTIONS

                    The Fund intends to pay dividends and any capital gain distributions on an annual basis.  You may have dividends or capital gain distributions that are declared by the Fund automatically reinvested at NAV in additional shares of the Fund.  You will make an election to receive dividends and distributions in cash or Fund shares at the time you purchase your shares.  You may change this election by notifying the Fund in writing at any time prior to the record date for a particular dividend or distribution.  There are no sales or other charges in connection with the reinvestment of dividends and capital gain distributions.  Shares purchased through dividend reinvestment will receive a price based on the NAV per share on the reinvestment date, which is typically the date dividends are paid to shareholders.  There is no fixed dividend rate, and there can be no assurance that the Fund will pay any dividends or realize any capital gains.

26


TAXATION

                    The following discussion summarizes certain U.S. federal income tax considerations affecting the Fund and its U.S. shareholders.  For more information, please see the SAI, under “Taxation.”  Because each shareholder’s tax situation is unique, ask your tax professional about the tax consequences to you of an investment in the Fund.

                    The Fund intends to qualify annually as a regulated investment company under the Internal Revenue Code.  Accordingly, the Fund generally will not be subject to U.S. federal income tax on income and gains that the Fund distributes to its shareholders.

                    Distributions paid to you by the Fund from its net realized long-term capital gains, if any, that the Fund designates as capital gains dividends (“capital gain dividends”) are taxable as long-term capital gains, regardless of how long you have held your shares.  All other dividends paid to you by the Fund (including dividends from short-term capital gains) from its current or accumulated earnings and profits (“ordinary income dividends”) are generally subject to tax as ordinary income.

                    Special rules apply, however, to ordinary income dividends paid to individuals with respect to taxable years beginning on or before December 31, 2008.  If you are an individual, any such ordinary income dividend that you receive from the Fund generally will be eligible for taxation at the rates applicable to long-term capital gains (currently at a maximum rate of 15%) to the extent that: (i) the ordinary income dividend is attributable to “qualified dividend income” ( i.e. , generally dividends paid by U.S. corporations and certain foreign corporations) received by the Fund, (ii) the Fund satisfies certain holding period and other requirements with respect to the stock on which such qualified dividend income was paid and (iii) you satisfy certain holding period and other requirements with respect to your shares.  Ordinary income dividends subject to these special rules are not actually treated as capital gains, however, and thus will not be included in the computation of your net capital gain and generally cannot be used to offset any capital losses.  Congress is currently considering certain proposals to extend the preferential tax rates for qualified dividend income beyond 2008, but no assurances can be given in this regard.

                    Dividends and other taxable distributions are taxable to you even if they are reinvested in additional shares of the Fund.  Dividends and other distributions paid by the Fund are generally treated as received by you at the time the dividend or distribution is made.  If, however, the Fund pays you a dividend in January that was declared in the previous October, November or December and you were the shareholder of record on a specified date in one of such months, then such dividend will be treated for tax purposes

27


as being paid by the Fund and received by you on December 31 of the year in which the dividend was declared.

                    The price of shares purchased at any time may reflect the amount of a forthcoming distribution.  If you purchase shares just prior to a distribution, you will receive a distribution that will be taxable to you even though it represents in part a return of your invested capital.

                    The Fund will send you information after the end of each year setting forth the amount and tax status of any distributions paid to you by the Fund.  Ordinary income dividends and capital gain dividends may also be subject to state and local taxes.

                    If you sell or otherwise dispose of shares of the Fund (including exchange them for shares of another fund), you will generally recognize a gain or loss in an amount equal to the difference between your tax basis in such shares of the Fund and the amount you receive upon disposition of such shares.  If you hold your shares as capital assets, any such gain or loss will be long-term capital gain or loss if you have held such shares for more than one year at the time of sale.

                    The Fund may be required to withhold, for U.S. federal backup withholding tax purposes, a portion of the dividends, distributions and redemption proceeds payable to a shareholder who fails to provide the Fund (or its agent) with the shareholder’s correct taxpayer identification number (in the case of an individual, generally, such individual’s social security number) or to make the required certification, or who has been notified by the Internal Revenue Service that such shareholder is subject to backup withholding.  Certain shareholders are exempt from backup withholding.  Backup withholding is not an additional tax and any amount withheld may be refunded or credited against your U.S. federal income tax liability, if any, provided that you furnish the required information to the IRS.

                    The discussions set forth herein and in the SAI do not constitute tax advice, and investors are urged to consult their own tax advisors to determine the specific U.S. federal, state, local and foreign tax consequences to them of investing in the Fund.

28


MAILINGS TO SHAREHOLDERS

                    In our continuing efforts to reduce duplicative mail and Fund expenses, we will send a single copy of the Fund’s prospectuses and shareholder reports to your household even if more than one family member in your household owns shares of the Fund.  Additional copies of our prospectuses and reports may be obtained by calling  877-665-1287.  If you do not want us to continue to consolidate your Fund mailings and would prefer to receive separate mailings at any time in the future, please call us at the telephone number above and we will resume separate mailings, in accordance with instructions, within 30 days of your request.

29


[Inside Back Cover]

PRIVACY POLICY

                    We recognize and respect your privacy expectations, whether you are a visitor to our web site, a potential shareholder, a current shareholder or even a former shareholder.

Collection of Information .  We may collect nonpublic personal information about you from the following sources:

 

•

Account applications and other forms, which may include your name, address and social security number, written and electronic correspondence and telephone contacts;

 

 

 

 

•

Web site information, including any information captured through our use of “cookies”; and

 

 

 

 

•

Account history, including information about the transactions and balances in your accounts with us or our affiliates.

Disclosure of Information .  We may share the information we collect with our affiliates.  We may also disclose this information as otherwise permitted by law.  We do not sell your personal information to third parties for their independent use.

Confidentiality and Security of Information .  We restrict access to nonpublic personal information about you to our employees and agents who need to know such information to provide products or services to you.  We maintain physical, electronic and procedural safeguards that comply with federal standards to guard your nonpublic personal information, although you should be aware that data protection cannot be guaranteed.

30


[Back Cover Page]

                    This Prospectus sets forth concisely the information that a prospective investor should know before investing in Class A Shares and Class C Shares of Highland Equity Opportunities Fund (the “Fund”).  Please read and retain this Prospectus for future reference.  A Statement of Additional Information (“SAI”) regarding the Fund and dated ________ __, 2006, has been filed with the SEC.  This Prospectus incorporates by reference the entire SAI (together with any supplement to it).

                    Additional information about the Fund’s investments will be available in the Fund’s annual and semi-annual reports to shareholders.  In the Fund’s annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund’s performance during its fiscal period just ended.

                    The SAI and the Fund’s annual and semi-annual reports can be obtained without charge by calling (877) 665-1287.  The SAI is also available by visiting the Fund’s website (http://www.highlandfunds.com) or writing to the Fund, c/o PFPC Inc., P.O. Box 9840, Providence, RI 02940.

                    Information about the Fund (including the SAI) can be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C.  Information about the Fund is available on the EDGAR Database on the SEC’s website at http://www.sec.gov.  Copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address:  publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-0102.

[Investment Co. Act
file number]

                    YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE INTO THIS PROSPECTUS.  THE FUND HAS NOT AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION.  IF ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT.  THE FUND IS NOT MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.

31



PROSPECTUS dated                      , 2006

HIGHLAND EQUITY OPPORTUNITIES FUND

Class Z Shares

Two Galleria Tower
13455 Noel Road, Suite 800
Dallas, Texas 75240
Telephone: (972) 628-4100
Facsimile: (972) 628-4147

An investment portfolio of Highland Funds I
managed by
Highland Capital Management, L.P.

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THE SHARES DESCRIBED IN THIS PROSPECTUS OR DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE.  ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.


TABLE OF CONTENTS

 

 

PAGE

 

 

Investment and Performance Summary

 

1

Fund Expenses

 

4

Investment and Risk Information

 

6

Management of the Fund

 

10

How to Buy Shares

 

13

Description of Class Z Shares

 

16

Redemption of Shares

 

17

Exchange of Shares

 

21

Net Asset Value

 

22

Dividends and Distributions

 

23

Taxation

 

24

Mailings to Shareholders

 

26

i


INVESTMENT AND PERFORMANCE SUMMARY

Investment Objective

                    The investment objective of Highland Equity Opportunities Fund (the “Fund”) is to seek consistent, above-average total returns primarily through capital appreciation, while also attempting to preserve capital and mitigate risk through hedging activities. 

Principal Investment Strategies

                    The Fund, invests, under normal circumstances, at least 80% of the value of its “Assets” in equity securities.  “Assets” means net assets, plus the amount of any borrowings for investment purposes.  Equity securities of domestic or foreign issuers in which the Fund may invest includes common stocks, preferred stocks, convertible securities, depositary receipts, limited partnership interests and warrants to buy common stocks.  In addition, the Fund may invest up to 20% of the value of its Assets in a wide variety of other, non-equity securities and financial instruments, domestic or foreign, of all kinds and descriptions, including but not limited to, bonds and other debt securities, money market instruments, illiquid securities, cash and cash equivalents. 

                    Derivatives, which are instruments that have a value based on another instrument, exchange rate or index, may be used as substitutes for securities in which the Fund can invest.  The Fund may use derivatives, primarily options, as tools in the management of portfolio assets.  The Fund may use derivatives to hedge various investments, for risk management and for income enhancement.

                    The Fund is a non-diversified portfolio of securities that seeks to maximize return while controlling risk.  In the absence of a pooling vehicle such as the Fund, an investor would not ordinarily be able to achieve the same degree of diversification or monitor, evaluate and implement the same investment strategies as the Fund.

                    The Fund’s investment strategy utilizes the analytical models of Prospect Management Advisers L.P. (“Prospect” or the “Sub-Adviser”) to evaluate potential equity securities of companies of varying market capitalizations in an attempt to isolate those securities with the greatest potential for capital appreciation.  The Sub-Adviser also endeavors to be proactive and attempt to take advantage of temporary market inefficiencies in order to boost the overall performance of the Fund.  In addition to investing in common stock, the Fund’s investment strategy includes short selling, options, fixed-income securities, leverage, capital structure arbitrage and event-driven investments.


                    In summary, the Fund seeks to provide superior and sustainable returns combined with effective risk management.  Although the strategy and asset allocation utilized by the Fund is primarily centered on publicly-traded equity securities, the Sub-Adviser intends to follow a flexible approach in order to place the Fund in the best position to capitalize on opportunities in the financial markets.  Accordingly, the Sub-Adviser may take advantage of investment opportunities and may invest up to 20% of the value of its Assets in other asset classes if they meet the Sub-Adviser’s standards of investment merit.  See “Investment and Risk Information.”  When adverse market or economic conditions occur, however, the Fund may temporarily invest all or a portion of its assets in defensive investments.  Such investments include fixed income securities or high quality money market instruments.  When following a defensive strategy, the Fund will be less likely to achieve its investment goals.

                    The Fund’s Board of Trustees may change any of these investment policies, including its investment objective, without shareholder approval.

                    The Fund is non-diversified as defined in the Investment Company Act of 1940 (the “1940 Act”).  The Fund, however, is not intended to be a complete investment program.

Principal Risks

                    No assurance can be given that the Fund will achieve its objective, and investment results may vary substantially over time and from period to period.  The Fund’s share price will fluctuate with changes in the market value of the Fund’s portfolio securities.  Stocks are subject to market, economic and business risks that cause their prices to fluctuate.  Preferred stocks and debt securities convertible into, or exchangeable for, common or preferred stock also are subject to interest rate risk, credit risk or both.  When interest rates rise, the value of such securities generally declines.  It is also possible that the issuer of such security will not be able to make interest and principal payments when due.  When you sell Fund shares, they may be worth less than what you paid for them.  Consequently, you can lose money by investing in the Fund.  The Fund is also subject to the risk that the Sub-Adviser may be incorrect in its assessment of the value of the securities it holds, which may result in the decline in the value of Fund shares.  The practices of options trading, short selling, use of leverage and other investment techniques employed by the Fund can, in certain circumstances, maximize the adverse impact to which the Fund’s investment portfolio may be subject.

You may want to invest in the Fund if you:

 

•

are a long-term investor

 

 

 

 

•

are seeking above-average growth of capital as well as income, while also attempting to preserve principal and manage risk

2


You may not want to invest in the Fund if you:

 

•

are conservative in your investment approach

 

 

 

 

•

seek stability of principal more than growth of capital

 

 

 

 

•

intend to trade frequently in Fund shares

Risk/Return Bar Chart and Table

                      The Fund’s commencement of operations is expected to begin on or about the date of this Prospectus; therefore, the Fund currently has no investment performance information to report.   After the Fund has had operations for at least one calendar year, its prospectuses will include a bar chart and a table that will provide an indication of the risks of investing in the Fund by showing changes in the Fund’s performance from year to year and by showing how the Fund’s average annual returns for the most recent one year, five years and ten years (or the life of the Fund, if shorter), compared to those of the Standard & Poor’s Corporation (“S&P”) 500 Index.  The S&P 500 Index is S&P’s composite index of 500 stocks, a widely-recognized, unmanaged index of common stock prices in the United States.  As with all mutual funds, the Fund’s past performance (before and after taxes) will not predict how the Fund will perform in the future.  Both the chart and the table will assume the reinvestment of dividends and distributions.

3


FUND EXPENSES

The following tables are intended to assist investors in understanding the various costs and expenses directly or indirectly associated with investing in Class Z Shares of the Fund.

 

 

Class Z

 

 

 

 

SHAREHOLDER TRANSACTION EXPENSES (1)

 

 

 

 

Exchange Fee

 

 

None

 

Redemption fee

 

 

2.00

%

 

ESTIMATED ANNUAL EXPENSES (as a percentage of average net assets)

 

 

 

 

Management Fees (2)

 

 

2.45

%

Other Expenses (3)

 

 

[__]

%

 

 

 

Total Annual Expenses (4)

 

 

[__]

%

Fee Waivers and Reimbursements

 

 

[(_

)]%

 

 

 

Net Expenses

 

 

2.60

%


(1)

Financial advisors (defined in “How to Buy Shares”) may independently charge additional fees for shareholder transactions or for advisory services.  Please see their materials for details.

 

 

(2)

Management fees include both investment advisory fees and administration fees charged to the Fund.  Highland receives from the Fund monthly advisory fees, computed and accrued daily, at the annual rate of 2.25% of the Fund’s average daily managed assets.  Highland also receives from the Fund monthly administration fees, computed and accrued daily, at the annual rate of 0.20% of the Fund’s average daily net assets.

 

 

(3)

“Other Expenses” are based on estimated amounts for the current fiscal year.

 

 

(4)

Pursuant to a written agreement, Highland has agreed to waive its advisory and/or administration fees and reimburse the Fund for certain expenses (exclusive of distribution and service fees, brokerage commissions, short sale dividend expense, taxes, deferred organization expenses and extraordinary expenses, if any) so that total annual expenses will not exceed 2.60% for Class Z Shares’ average daily net assets for the Fund’s first year of operations.  Any such waiver or reimbursement will lower the class’s overall expense ratio and increase its overall return to investors.

EXPENSE EXAMPLE.  This Example helps you compare the cost of investing in the Fund to the cost of investing in other mutual funds.  The Example assumes that (i) you invest $10,000 in the Fund, (ii) your investment has a 5% return each year, (iii) operating expenses remain the same, and (iv) all income dividends and capital gains distributions

4


are reinvested in additional shares.  The Example should not be considered a representation of future expenses.  Your actual costs may be higher or lower.

CLASS

 

  1 YEAR

 

  3 YEARS

 

 

 

 

Class Z:

 

$

[_____]

 

$

[______]

 

5


INVESTMENT AND RISK INFORMATION

Investment Objective

                    The Fund’s investment objective is to seek consistent, above-average total returns primarily through capital appreciation, while also attempting to preserve capital and mitigate risk through hedging activities. 

Investment Strategies

Long Equity .  The Sub-Adviser expects a majority of the Fund’s investments will generally be in common stock.  The Fund’s focus will be on companies of varying size that have a reasonable expectation of producing above average returns.  The Sub-Adviser favors companies that are actively traded in the United States, but is willing to invest in companies without respect to market capitalization, geographic location or market sector.  In addition, the Sub-Adviser believes that in order to sustain superior investment results, it is necessary to concentrate the Fund’s portfolio from time to time in investments that will produce high absolute returns while at the same time reducing risk to the overall portfolio.   Thus, the Fund may have limited diversification.

The Sub-Adviser will analyze certain financial measures before investing in a company, such as the company’s historical and expected cash flows, its projected earnings growth, its valuation relative to its growth and to that of its industry, the historical trading patterns of the company’s securities, and forecasts and projections for the relevant industry group.  The Sub-Adviser will at times gather information about a company from consultants, analysts, competitors, suppliers and customers that may help the effectiveness of the analysis performed.

Short Selling .  The Sub-Adviser may short individual stocks as a means of attempting to reduce risk and increase performance.  Stocks are shorted for a variety of reasons including: (i) temporary overvaluation due to short-term market euphoria for a sector; (ii) faulty business model; (iii) poor earnings; (iv) questionable accounting practices; (v) deteriorating fundamentals; and (vi) weak management unable to adapt to changes in technology, regulation or the competitive environment.  Technical analysis may also be used to help in the decision making process.  The Sub-Adviser believes that by focusing on specific companies that are experiencing any one or more of these elements, the Sub-Adviser should be able to identify profitable short sale candidates in most stock market environments.

6


Investment Process

Investment Identification .  The Sub-Adviser will use two primary methods of identifying potential investments.  The first method will involve independent sorting and research of financial and corporate documents filed with the Securities and Exchange Commission (“SEC”), as well as general and financial news, through the use of third-party research databases, news services and screening software.  The second method will rely on the professional relationships that the Sub-Adviser has established with money managers, leveraged buyout and private equity investors, investment bankers, research analysts, securities traders, brokers, corporate managers, corporate attorneys and accountants.

The Sub-Adviser’s investment decisions will take into consideration its view of macroeconomic conditions and industry trends, and will be based on the Sub-Adviser’s analysis of a security’s relative value.  It is contemplated that investments will be made without regard to a company’s level of capitalization or the tax consequences of the investment (short or long-term capital gains).

Portfolio Evaluation .  Once an investment opportunity is determined to be attractive as a stand-alone investment, the Sub-Adviser will evaluate the effect of adding that investment to the Fund’s portfolio.  In doing so, the Sub-Adviser will seek to minimize the market-related portfolio volatility as well as the risk of a capital loss.

Investment and Portfolio Monitoring .  The Sub-Adviser will continually monitor the Fund’s positions to ensure that the investment thesis behind each is intact.  The Sub-Adviser will also monitor trading prices so that profits can be taken as trading and intrinsic values converge or losses can be minimized in the event of a significant shift in an investment’s fundamental premise.  The Sub-Adviser will further monitor investment positions in view of the portfolio as a whole in order to manage risk.

                    The investment policy of the Fund requiring it to invest at least 80% of the value of its Assets in equity securities may be changed by the Board of Trustees without shareholder approval.  Shareholders, however, will receive at least 60 days’ prior notice of any change in this policy.

                    In selecting investments for the Fund, the Sub-Adviser focuses on issuers that:

 

•

have strong, free cash flow and pay regular dividends

 

 

 

 

•

have potential for long-term earnings per share growth

 

 

 

 

•

may be subject to a value catalyst, such as industry developments, regulatory changes, changes in management, sale or spin-off of a division or the development of a profitable new business

7


 

•

are well-managed

 

 

 

 

•

will benefit from sustainable long-term economic dynamics, such as globalization of an issuer’s industry or an issuer’s increased focus on productivity or enhancement of services.

                    The Sub-Adviser also believes preferred stock and convertible securities of selected companies offer opportunities for capital appreciation as well as periodic income and may invest a portion of the Fund’s assets in such securities.  This is particularly true in the case of companies that have performed below expectations.  If a company’s performance has been poor enough, its preferred stock and convertible debt securities will trade more like the common stock than like a fixed income security and may result in above average appreciation if performance improves.  Even if the credit quality of the company is not in question, the market price of the convertible security will reflect little or no element of conversion value if the price of its common stock has fallen substantially below the conversion price.  This leads to the possibility of capital appreciation if the price of the common stock recovers.

                    The Fund emphasizes value.  The Fund will generally take long positions in equity securities that the Sub-Adviser believes are undervalued and short positions in equity securities that the Sub-Adviser believes are overvalued.

                    Investing in the Fund involves the following risks:

Frequency of Trading .  Some of the strategies and techniques to be employed by the Sub-Adviser may require frequent trades to take place.  As a result, the higher the Fund’s portfolio turnover than that for other investment entities of similar size, the higher its capital gains taxes and brokerage commissions.  The frequency of the Fund’s trading will vary from year to year, depending on market conditions.

Concentration of Investments .  Due to the nature of the Fund’s investment strategy, it is possible that a material amount of the Fund’s equity could be invested in the securities of only a few companies.  The concentration of the Fund’s portfolio in any one issuer or industry would subject the Fund to a greater degree of risk with respect to the failure of one or a few issuers or with respect to economic downturns in relation to such industry. 

Hedging Transactions .  Hedging strategies in general are usually intended to limit or reduce investment risk, but can also be expected to limit or reduce the potential for profit.  No assurance can be given that any particular hedging strategy will be successful.

Market Volatility .  The profitability of the Fund substantially depends upon the Sub-Adviser’s correctly assessing the future price movements of stocks, bonds, options on stocks, and other securities and the movements of interest rates.  The Sub-Adviser cannot guarantee that it will be successful in accurately predicting price and interest rate movements.

8


The Fund’s Investment Activities .  The Fund’s investment activities involve a significant degree of risk.  The performance of any investment is subject to numerous factors that are neither within the control of, nor predictable by, the Sub-Adviser.  Such factors include a wide range of economic, political, competitive and other conditions that may affect investments in general or specific industries or companies.  In recent years, the securities markets have become increasingly volatile, which may adversely affect the ability of the Fund to realize profits.  As a result of the nature of the Fund’s investment activities, it is possible that the Fund’s financial performance may fluctuate substantially from period to period.

Counterparty Creditworthiness .  The Fund intends to engage in transactions in securities and financial instruments, such as repurchase agreements, that involve counterparties.  Under certain conditions, a counterparty to a transaction could default or the market for certain securities and/or financial instruments may become illiquid.

Portfolio Holdings

                    A description of the Fund’s policies and procedures with respect to the disclosure of the Fund’s portfolio securities is available (i) in the Fund’s Statement of Additional Information (“SAI”) and (ii) on the Fund’s website:  http://www.highlandfunds.com.

9


MANAGEMENT OF THE FUND

Board of Trustees and Investment Adviser

                    The Board of Trustees of the Fund has overall management responsibility for the Fund.  See “Management” in the SAI for the names of and other information about the Trustees and officers of the Fund.  Highland Capital Management, L.P., 13455 Noel Road, Suite 800, Dallas, Texas 75240 (“Highland”), serves as the investment adviser to the Fund.  The Fund and Highland have entered into an Investment Advisory Agreement pursuant to which Highland is responsible for the ongoing monitoring of the Fund’s investment portfolio and oversees the activities of the Fund’s Sub-Adviser, and in that connection Highland furnishes offices, necessary facilities and equipment, personnel and pays the compensation of the Trustee of the Fund who is its affiliate.  Highland receives from the Fund monthly advisory fees, computed and accrued daily, at the annual rate of 2.25% of the Fund’s “Average Daily Managed Assets.”  “Average Daily Managed Assets” of the Fund shall mean the average daily value of the total assets of the Fund, less all accrued liabilities of the Fund (other than the aggregate amount of any outstanding borrowings constituting financial leverage).  The agreement with the Adviser can be terminated on 60 days’ written notice. 

                    Organized in March 1993, Highland is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (“Advisers Act”).  As of January 31, 2006, Highland had approximately $22 billion in assets under management, approximately $800 million of which consisted of equity securities.  Highland is also the Fund’s Administrator (see “Administrator/Sub-Administrator” in the SAI for details).  Highland is controlled by James Dondero and Mark Okada, by virtue of their respective share ownership, and its general partner, Strand Advisors, Inc., of which Mr. Dondero is the sole stockholder.

Sub-Adviser

                    Prospect Management Advisers, L.P., 13455 Noel Road, Suite 1300, Dallas, Texas 75240 (“Prospect” or “Sub-Adviser”), a wholly-owned subsidiary of Highland, has entered into a Sub-Advisory Agreement with Highland, on behalf of the Fund.  Pursuant to the Sub-Advisory Agreement, Prospect will provide the day-to-day management of the Fund’s portfolio of securities, which includes buying and selling securities for the Fund and investment research.  The Sub-Adviser also provides personnel to the Fund.

                    For such services the Sub-Advisory Agreement provides that the fee paid by the Adviser to the Sub-Adviser will consist of two components:  (1)  a base fee of 1.00% of the Fund’s average daily net assets during the previous month  (“Base Fee”),

10


plus or minus (2)  a performance-fee adjustment (“Performance Adjustment”) calculated monthly by applying a variable rate of up to a maximum of 0.15% (positive or negative) to the Fund’s average daily net assets during the applicable performance measurement period.  The performance measurement period generally will be a rolling 18-month period, although no Performance Adjustment will be made until the Fund has been operational for at least 12 months, and accordingly, only the Base Fee rate will apply for the initial 12 months.  Once the Fund has been operational for at least 12 months, but less than 18 months, the performance measurement period will be equal to the time that has elapsed since the Fund’s commencement of operations.

                    The Performance Adjustment may result in an increase or decrease in the sub-advisory fee paid by Highland, depending upon the investment performance of the Fund relative to its benchmark index, the S&P 500 Index (the “Index”), over the performance measurement period.  No Performance Adjustment will be applied unless the difference between the Fund’s investment performance and the investment record of the S&P 500 Index is 1.00% or greater (positive or negative) during the applicable performance measurement period.  If during the applicable performance measurement period the Fund’s investment performance were:

 

(i)

at least 1.00% (but less than 2.50%) greater (positive or negative) than the investment record of the Index, then the Performance Adjustment would be 0.05% (positive or negative, respectively);

 

 

 

 

(ii)

at least 2.50% (but less than 4.50%) greater (positive or negative) than the investment record of  the Index, then the Performance Adjustment would be 0.10% (positive or negative, respectively); or

 

 

 

 

(iii)

at least 4.50% greater (positive or negative) than the investment record of the Index, then the Performance Adjustment would be 0.15%(positive or negative, respectively).

                     Performance of the Fund is calculated net of expenses; whereas, the S&P 500 Index does not have any fees or expenses.  Reinvestments of dividends and distributions are included in calculating both the performance of the Fund and the S&P 500 Index.

                    The investment performance of Class Z Shares will be used for purposes of calculating the Fund’s Performance Adjustment.  After Highland determines whether the Fund’s performance was above or below the S&P 500 Index by comparing the investment performance of the Class Z Shares against the investment record of the S&P 500 Index, Highland will apply the same Performance Adjustment (positive or negative) across each other class of shares of the Fund.

11


                    In addition, Highland and Prospect have entered into a waiver agreement pursuant to which Prospect has agreed to waive 0.50% of its fee determined pursuant to the Sub-Advisory Agreement.  This agreement shall remain in effect until terminated by Highland.

                    Prospect was organized in November 2004 and is registered as an investment adviser under the Advisers Act.  As of December 31, 2005, Prospect had approximately $ 21.8 million under management, 100% of which consisted of equity securities.

Portfolio Management Team

                    The Fund’s portfolio is managed by a portfolio management team.  The SAI provides additional information about the portfolio management team, including compensation structure, other accounts the team manages and ownership of Fund shares.

Distributor

                    Fund shares are offered for sale through PFPC Distributors, Inc. (the “Distributor”), 760 Moore Road, King of Prussia, Pennsylvania 19406.

12


HOW TO BUY SHARES

                    You can purchase shares of the Fund on any day that the New York Stock Exchange (“NYSE”) is open for business (see “Net Asset Value”).  Your financial advisor, broker or other financial intermediary (“financial advisor”) can help you establish an appropriate investment portfolio, buy shares, and monitor your investments.  When the Fund receives your purchase request in “good form,” it will accept your order and your shares will be bought at the next calculated net asset value (“NAV”).  “Good form” means that you placed your order with your financial advisor or your payment (in accordance with any of the methods set forth in the table below) has been received and your application is complete, including all necessary signatures.  The Fund has authorized one or more financial advisors to receive on its behalf purchase and redemption orders.  These financial advisors are authorized to designate other intermediaries to receive purchase and redemption orders on the Fund’s behalf.  The Fund will be deemed to have received a purchase or redemption order when an authorized financial advisor or its authorized designee receives the order.  Customer orders will be priced at the Fund’s NAV next computed after they are received by an authorized financial advisor or its authorized designee and accepted by the Fund.  Investors may be charged a fee if they effect a transaction in Fund shares through either a financial advisor or its authorized designee.

                    The USA Patriot Act may require the Fund, an authorized financial advisor or its authorized designee to obtain certain personal information from you, which will be used to verify your identity.  If you do not provide the information, it may not be possible to open your account.  If the Fund, authorized financial advisor or authorized designee is unable to verify your customer information, it reserves the right to close your account or to take such other steps as it deems reasonable.  Outlined below are various methods for buying shares:

Method

 

Instructions

 

Through your financial advisor

 

Your financial advisor can help you establish your account and buy Fund shares on your behalf.  To receive the current trading day’s price, your financial advisor must receive your request prior to the close of regular trading on the NYSE, usually 4:00 p.m.  Eastern time.  Your financial advisor may charge you fees for executing the purchase for you.

13


Method

 

Instructions

 

By check* (new account)

 

For new accounts, send to the Fund, c/o the Transfer Agent, PFPC Inc., at the address noted below,** a completed application and check made payable to “Highland Equity Opportunities Fund.”

 

 

 

By check* (existing account)

 

For existing accounts, fill out and return to the Fund, c/o the Transfer Agent, PFPC Inc., at the address noted below,** the additional investment stub included in your account statement, or send a letter of instruction, including the Fund name and account number, with a check made payable to “Highland Equity Opportunities Fund.”

 

 

 

By exchange

 

You or your financial advisor may acquire shares of the Fund for your account by exchanging shares you own in other Highland funds for shares of the same class of the Fund at no additional cost (see “Exchange of Shares”).  To exchange, send written instructions to the Fund, c/o the Transfer Agent, PFPC Inc., at the address noted below** or call (877) 665-1287.

 

 

 

By wire

 

You may purchase shares of the Fund by wiring money from your bank account to your Fund account.  Send funds by wire to:

 

 

 

 

 

PNC Bank, N.A.

 

 

Philadelphia, PA

 

 

ABA #031-0000-53

 

 

FFFC #8615597735

 

 

 

 

 

Highland Funds

 

 

FBO:  ([Name of] Fund/[Your]Account number)

 

 

 

 

 

If your initial purchase of shares is by wire, you must complete a new account application and promptly mail it to the Fund, c/o the Transfer Agent, PFPC Inc., at the address noted below.** After completing a new account application, please call (877) 665-1287 to obtain your account number.  Please include your account number on the wire.


*

The redemption of shares purchased by check or an automated clearing house (“ACH”) transaction is subject to certain limitations (see “Redemption of Shares”).  Any purchase by check or ACH that does not clear may be cancelled, and the investor will be responsible for any expenses and losses to the Fund.

14


**

Regular Mail: Send to the Fund, c/o PFPC Inc., P.O. Box 9840, Providence, RI 02940 Overnight Mail: Send to the Fund, c/o PFPC Inc., 101 Sabin Street, Pawtucket, RI 02860


By electronic funds transfer via automated clearing house (ACH)*

 

You may purchase shares of the Fund by electronically transferring money from your bank account to your Fund account by calling (877) 665-1287.  An electronic funds transfer may take up to two banking days to settle and be considered in “good form.” You must set up this feature prior to your telephone request.  Be sure to complete the appropriate section of the application.

 

 

 

Automatic Investment Plan

 

You may make monthly or quarterly investments automatically from your bank account to your Fund account.  You may select a pre-authorized amount to be sent via electronic funds transfer.  For this feature, please call the Fund at (877) 665-1287 or visit the Fund’s website (http://www.highlandfunds.com).


*

Regular Mail: Send to the Fund, c/o PFPC Inc., P.O. Box 9840, Providence, RI 02940 Overnight Mail: Send to the Fund, c/o PFPC Inc., 101 Sabin Street, Pawtucket, RI 02860

 

 

**

The redemption of shares purchased by check or an automated clearing house (“ACH”) transaction is subject to certain limitations (see “Redemption of Shares”).  Any purchase by check or ACH that does not clear may be cancelled, and the investor will be responsible for any expenses and losses to the Fund.


Investment Minimums

 

 

 

 

 

 

 

 

Initial Investment

 

$

5,000

 

Subsequent Investments

 

$

1,000

 

Automatic Investment Plan

 

$

200

 

Retirement Plans

 

$

25

 

                    The Fund reserves the right to change the investment minimums.  The Fund also reserves the right to refuse a purchase order for any reason, including if it believes that doing so would be in the best interests of the Fund and its shareholders.

15


DESCRIPTION OF CLASS Z SHARES

Multiple Class Fund

                    The Fund offers one class of shares in this Prospectus — Class Z Shares, which are available to eligible investors at NAV without a sales charge or contingent deferred sales charge.  The Fund also offers two classes of shares to retail investors in a separate prospectus — Class A Shares and Class C Shares.

Eligible Investors

                    The Fund offers Class Z Shares exclusively to certain institutional and other eligible investors.  Eligible investors are as follows:

 

•

Clients of broker-dealers or registered investment advisers that both recommend the purchase of Fund shares and charge clients an asset-based fee;

 

 

 

 

•

A retirement plan (or the custodian for such plan) with aggregate plan assets of at least $5 million at the time of purchase and that purchases shares directly from the Fund or through a third party broker-dealer;

 

 

 

 

•

Any insurance company, trust company or bank purchasing shares its own account;

 

 

 

 

•

Any endowment, investment company or foundation; and

 

 

 

 

•

Any trustee of the Fund, any employee of Highland or Prospect and any family member of any such trustee or employee

                    The Fund reserves the right to change the criteria for eligible investors.  The Fund also reserves the right to refuse a purchase order for any reason, including if it believes that doing so would be in the best interests of the Fund and its shareholders. 

16


REDEMPTION OF SHARES

                    You can redeem shares of the Fund on any day that the NYSE is open for business.  The Fund, however, may temporarily stop redeeming its shares when trading on the NYSE is restricted, when an emergency exists and the Fund cannot sell its shares or accurately determine the value of its assets, or if the SEC orders the Fund to suspend redemptions.

                    The Fund redeems its shares based on the net asset value next determined after the Fund receives your redemption request in proper form.  See “Net Asset Value” for a description of the calculation of net asset value.

                    The Fund is intended for long-term investors and not for those who wish to trade frequently in Fund shares.  The Fund believes that excessive short-term trading of Fund shares, such as by traders seeking short-term profits from market momentum, time zone arbitrage and other timing strategies, creates risks for the Fund and its long-term shareholders, including interference with efficient portfolio management, increased administrative and brokerage costs and potential dilution in the value of shares.

                    In order to discourage frequent short-term trading in Fund shares, the Fund has adopted policies and procedures that impose a 2.00% redemption fee (short-term trading fee) on Class Z Shares that are redeemed or exchanged within two months or less after the date of a purchase.  This fee is calculated based on the shares’ aggregate net asset value on the date of redemption and deducted from the redemption proceeds.  The redemption fee is not a sales charge, is retained by the Fund, and does not benefit the Fund’s Adviser, Distributor or any other third party.  For purposes of computing the redemption fee, shares will be redeemed in reverse order of purchase (the latest shares acquired will be redeemed first).  Redemptions to which the fee applies include redemption of shares resulting from an exchange made pursuant to the Fund’s exchange privilege.  The redemption fee will not apply to redemptions of shares where (i) the shares were purchased through automatic reinvestment of dividends or other distributions, (ii) the redemption is initiated by the Fund, (iii) shares were purchased through programs that collect the redemption fee at the program level and remit them to the Fund, (iv) shares were purchased through programs that the Adviser determines to have appropriate anti-short-term trading polices in place or as to which the Adviser has received assurances that look-through redemption fee procedures or effective anti-short term trading policies and procedures will be in place or (v) shares were purchased through certain qualified and non-qualified retirement plans if recordkeepers for retirement plan participants cannot implement redemption fees because of systems limitation and such recordkeepers have provided verification to that effect.  Such recordkeepers may be permitted to delay, temporarily, the implementation of redemption fees.  These programs

17


include programs utilizing omnibus accounts.  The Fund seeks to apply these policies uniformly.

                    Any shareholder purchasing shares of the Fund through a financial advisor should check with the financial advisor or the Fund to determine whether the shares will be subject to the redemption fee.

                    The Fund continues to reserve all rights, including the right to refuse any purchase request (including requests to purchase by exchange) from any person or group who, in the Fund’s view, is likely to engage in excessive trading or if such purchase is not in the best interests of the Fund and to limit, delay or impose other conditions on exchanges or purchases.  The Fund has adopted a policy of seeking to minimize short-term trading in its shares and monitors purchase and redemption activities to assist in minimizing short-term trading.

                    You may redeem shares through the Distributor or directly from the Fund through the Fund’s transfer agent.  Outlined below are various methods for redeeming shares:

Method

 

Instructions

 

By letter

 

You may mail a letter requesting redemption of shares to:

 

 

Highland Equity Opportunities Fund, c/o PFPC Inc., P.O. Box 9840, Providence, RI 02940. Your letter should state the name of the Fund and the share class, the dollar amount or number of shares you are redeeming and your account number.  You must sign the letter in exactly the same way the account is registered.  If there is more than one owner of shares, all must sign.  A signature guarantee is required for each signature on your redemption letter.  You can obtain a signature guarantee from financial institutions, such as commercial banks, brokers, dealers and savings associations.  A notary public cannot provide a signature guarantee.

 

 

 

By telephone or the Internet

 

Unless you have requested that telephone or Internet  redemptions  from your account not be permitted, you may redeem your shares in an account (including an IRA) directly registered with PFPC, Inc.by

18


Method

 

Instructions

 

 

 

calling 877-665-1287or visiting our website at www.highlandfunds.com.  IRA shareholders should consult a tax advisor concerning the current tax rules applicable to IRAs.  If PFPC, Inc. acts on telephone or Internet instructions after following reasonable procedures to protect against unauthorized transactions, neither PFPC, Inc. nor the Fund will be responsible for any losses due to unauthorized telephone or Internet transactions and instead you would be responsible.  You may request that proceeds from telephone or Internet redemptions be mailed to you by check (if your address has not changed in the prior 30 days), forwarded to you by bank wire or invested in another investment company advised by the Adviser or participating in the Fund’s exchange privilege (see “Exchange of Shares”).  Among the procedures PFPC, Inc. may use are passwords or verification of personal information.  The Fund may impose limitations from time to time on telephone or Internet redemptions.

 

 

 

•     proceeds by check

 

The Fund will make checks payable to the name in which the account is registered and normally will mail the check to the address of record within seven days.

 

 

 

•     proceeds by bank wire

 

The Fund accepts telephone or Internet requests for wire redemption in amounts of at least $1,000. The Fund will send a wire to either a bank designated on your new account application or on a subsequent letter with a guaranteed signature.  The proceeds are normally wired on the next business day.

19


Automatic Cash Withdrawal Plan

                    You may automatically redeem shares on a monthly basis if you have at least $10,000 in your account and if your account is directly registered with PFPC, Inc.  Call 877-665-1287 for more information about this plan.

Involuntary Redemption

                    The Fund may redeem all shares in your account (other than an IRA) if their aggregate value falls below $5,000 as a result of redemptions (but not as a result of a decline in net asset value).  You will be notified in writing if the Fund initiates such action and allowed 30 days to increase the value of your account to at least $5,000.

Redemption Proceeds

                    A redemption request received by the Fund will be effected at the net asset value next determined after the Fund receives the request.  If you request redemption proceeds by check, the Fund will normally mail the check to you within seven days after receipt of your redemption request.  If, however, you purchased your Fund shares by check or ACH transaction and unless you have documentation satisfactory to the Fund that your transaction has cleared, the Fund may hold proceeds for shares purchased by check or ACH until the purchase amount has been deemed collected, which is eight business days for checks and five business days for ACH transactions.  While the Fund will delay the processing of the payment until the check clears, your shares will be valued at the next determined NAV after receipt of your redemption request.

                    The Fund may pay your redemption proceeds wholly or partially in portfolio securities.  Payments would be made in portfolio securities only in the rare instance that the Board of Trustees believes that it would be in the Fund’s best interests not to pay redemption proceeds in cash.

20


EXCHANGE OF SHARES

                    Shareholders of the Fund may exchange their shares for shares of the same share class of Highland Floating Rate Fund or Highland Floating Rate Advantage Fund (together, the “Floating Rate Funds”) at the applicable NAV, plus any applicable redemption fee (see “Redemption of Shares”).  Shareholders of the Floating Rate Funds may exchange their shares for shares of the same class of the Fund at the applicable NAV.  The Floating Rate Funds are each continuously offered closed-end funds and are limited to quarterly repurchases.  The minimum to open an account in the Floating Rate Funds is $2500 ($25 for individual retirement accounts) and the minimum subsequent investment is $50.  Call 877-665-1287 for the applicable Floating Rate Funds’ prospectus and read it carefully before investing.  You can also exchange your shares for shares of the RBB Money Market Fund (the “Money Market Fund”).  The minimum to open an account in the Money Market Fund is $1,000, and subsequent investments must be at least $100.  Call (877) 665-1287 for the Money Market Fund prospectus and read it carefully before investing. 

                    If the shares you are exchanging are subject to a CDSC, you will not be charged a CDSC upon the exchange.  However, when you sell the shares acquired through the exchange, the shares sold may be subject to a CDSC, depending upon when you originally purchased the shares you are exchanging.  The length of time you have owned your shares will be computed from the date of your original purchase and the applicable CDSC will be the CDSC of the original fund.  No CDSC is charged when you exchange your shares into the Money Market Fund; however, the applicable CDSC will be imposed when shares are redeemed from the Money Market Fund.  Upon redemption, the applicable CDSC will be calculated without regard to the time such shares were held in the Money Market Fund.  Your exchange privilege will be revoked if the exchange activity is considered excessive.  In addition, the Fund may reject any exchange request for any reason, including if it does not think that it is in the best interests of the Fund and/or its shareholders to accept the exchange.

                    Unless your account is part of a tax-deferred retirement plan, an exchange is a taxable event, and you may realize a gain or a loss for tax purposes (see “Taxation”).  The Fund may terminate your exchange privilege if the Adviser determines that your exchange activity is likely to impact adversely its ability to manage the Fund.  To exchange by telephone, call (877) 665-1287.  Please have your account and taxpayer identification number available when calling.

21


NET ASSET VALUE

                    The NAV per share of the Fund’s Class Z Shares is calculated on each day that the NYSE is open for business.  The NYSE is open Monday through Friday, but currently is scheduled to be closed on New Year’s Day, Dr. Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day and on the preceding Friday or subsequent Monday when a holiday falls on a Saturday or Sunday, respectively.

                    The NAV per share of each class of shares is determined as of the close of regular trading on the NYSE, normally 4:00 p.m., Eastern Time.  NAV per share is computed by dividing the value of the Fund’s net assets (i.e., the value of its securities and other assets less its liabilities, including expenses payable or accrued but excluding capital stock and surplus) attributable to the class of shares by the total number of shares of the class outstanding at the time the determination is made.  The price of a particular class of Fund shares for the purpose of purchase and redemption orders will be based upon the calculation of NAV per share next made after the purchase or redemption order is received in good form.

                    Portfolio securities for which market quotations are readily available are valued at their current market value.  Portfolio securities for which market quotations are not readily available are valued at fair value as determined in good faith pursuant to policies and procedures approved by the Fund’s Board of Trustees.  Debt securities that are not credit-impaired with remaining maturities of 60 days or less are generally valued at their amortized cost.  Pursuant to the Fund’s pricing procedures, securities for which market quotations are not readily available, and therefore are subject to being fair valued, may include securities that are subject to legal or contractual restrictions on resale, securities for which no or limited trading activity has occurred for a period of time, or securities that are otherwise deemed to be illiquid (i.e., securities that cannot be disposed of within seven days at approximately the price at which the security is currently priced by the Fund).  Market prices may also be deemed not to be readily available in circumstances when an event has occurred after the close of the principal foreign market on which a security trades, but before the time for determination of the Fund’s NAV that has affected, or is likely to affect, more than minimally the NAV per share of the Fund.  Currently, the Fund fair values securities traded primarily on markets that close prior to the time as of which the Fund’s NAV is calculated whenever the Fund concludes that occurrences after such closing times may have more than a minimal effect on the value of its portfolio.

                    When a market price is not readily available, a portfolio security is valued at its fair value, as determined in good faith under procedures established by the Board of

22


Trustees.  In determining fair value, the Fund’s pricing procedures establish a process and methodology to be employed in attempting to ascertain, in good faith, fair value.  Fair value is defined as the amount for which assets could be sold in an orderly disposition over a reasonable period of time, taking into account the nature of the asset.  Fair value pricing, however, involves judgments that are inherently subjective and inexact, since fair valuation procedures are used only when it is not possible to be sure what value should be attributed to a particular asset or when an event will affect the market price of an asset and to what extent.  As a result, there can be no assurance that fair value pricing will reflect actual market value and it is possible that the fair value determined for a security will be materially different from the value that actually could be or is realized upon the sale of that asset.  The Board of Trustees will review the Adviser’s fair value determinations periodically.  The value of the Fund’s portfolio assets may change on days the Fund is closed and on which you are not able to purchase or sell your shares.

DIVIDENDS AND DISTRIBUTIONS

                    The Fund intends to pay dividends and any capital gain distributions on an annual basis.  You may have dividends or capital gain distributions that are declared by the Fund automatically reinvested at NAV in additional shares of the Fund.  You will make an election to receive dividends and distributions in cash or Fund shares at the time you purchase your shares.  You may change this election by notifying the Fund in writing at any time prior to the record date for a particular dividend or distribution.  There are no sales or other charges in connection with the reinvestment of dividends and capital gain distributions.  Shares purchased through dividend reinvestment will receive a price based on the NAV per share on the reinvestment date, which is typically the date dividends are paid to shareholders.  There is no fixed dividend rate, and there can be no assurance that the Fund will pay any dividends or realize any capital gains.

23


TAXATION

                    The following discussion summarizes certain U.S. federal income tax considerations affecting the Fund and its U.S. shareholders.  For more information, please see the SAI, under “Taxation.”  Because each shareholder’s tax situation is unique, ask your tax professional about the tax consequences to you of an investment in the Fund.

                    The Fund intends to qualify annually as a regulated investment company under the Internal Revenue Code.  Accordingly, the Fund generally will not be subject to U.S. federal income tax on income and gains that the Fund distributes to its shareholders.

                    Distributions paid to you by the Fund from its net realized long-term capital gains, if any, that the Fund designates as capital gains dividends (“capital gain dividends”) are taxable as long-term capital gains, regardless of how long you have held your shares.  All other dividends paid to you by the Fund (including dividends from short-term capital gains) from its current or accumulated earnings and profits (“ordinary income dividends”) are generally subject to tax as ordinary income.

                    Special rules apply, however, to ordinary income dividends paid to individuals with respect to taxable years beginning on or before December 31, 2008.  If you are an individual, any such ordinary income dividend that you receive from the Fund generally will be eligible for taxation at the rates applicable to long-term capital gains (currently at a maximum rate of 15%) to the extent that: (i) the ordinary income dividend is attributable to “qualified dividend income” ( i.e. , generally dividends paid by U.S. corporations and certain foreign corporations) received by the Fund, (ii) the Fund satisfies certain holding period and other requirements with respect to the stock on which such qualified dividend income was paid and (iii) you satisfy certain holding period and other requirements with respect to your shares.  Ordinary income dividends subject to these special rules are not actually treated as capital gains, however, and thus will not be included in the computation of your net capital gain and generally cannot be used to offset any capital losses.  Congress is currently considering certain proposals to extend the preferential tax rates for qualified dividend income beyond 2008, but no assurances can be given in this regard.

                    Dividends and other taxable distributions are taxable to you even if they are reinvested in additional shares of the Fund.  Dividends and other distributions paid by the Fund are generally treated as received by you at the time the dividend or distribution is made.  If, however, the Fund pays you a dividend in January that was declared in the previous October, November or December and you were the shareholder of record on a specified date in one of such months, then such dividend will be treated for tax purposes

24


as being paid by the Fund and received by you on December 31 of the year in which the dividend was declared.

                    The price of shares purchased at any time may reflect the amount of a forthcoming distribution.  If you purchase shares just prior to a distribution, you will receive a distribution that will be taxable to you even though it represents in part a return of your invested capital.

                    The Fund will send you information after the end of each year setting forth the amount and tax status of any distributions paid to you by the Fund.  Ordinary income dividends and capital gain dividends may also be subject to state and local taxes.

                    If you sell or otherwise dispose of shares of the Fund (including exchange them for shares of another fund), you will generally recognize a gain or loss in an amount equal to the difference between your tax basis in such shares of the Fund and the amount you receive upon disposition of such shares.  If you hold your shares as capital assets, any such gain or loss will be long-term capital gain or loss if you have held such shares for more than one year at the time of sale.

                    The Fund may be required to withhold, for U.S. federal backup withholding tax purposes, a portion of the dividends, distributions and redemption proceeds payable to a shareholder who fails to provide the Fund (or its agent) with the shareholder’s correct taxpayer identification number (in the case of an individual, generally, such individual’s social security number) or to make the required certification, or who has been notified by the Internal Revenue Service that such shareholder is subject to backup withholding.  Certain shareholders are exempt from backup withholding.  Backup withholding is not an additional tax and any amount withheld may be refunded or credited against your U.S. federal income tax liability, if any, provided that you furnish the required information to the IRS.

                    The discussions set forth herein and in the SAI do not constitute tax advice, and investors are urged to consult their own tax advisors to determine the specific U.S. federal, state, local and foreign tax consequences to them of investing in the Fund.

25


MAILINGS TO SHAREHOLDERS

                    In our continuing efforts to reduce duplicative mail and Fund expenses, we will send a single copy of the Fund’s prospectuses and shareholder reports to your household even if more than one family member in your household owns shares of the Fund.  Additional copies of our prospectuses and reports may be obtained by calling  877-665-1287.  If you do not want us to continue to consolidate your Fund mailings and would prefer to receive separate mailings at any time in the future, please call us at the telephone number above and we will resume separate mailings, in accordance with instructions, within 30 days of your request.

26


[Inside Back Cover]

PRIVACY POLICY

                    We recognize and respect your privacy expectations, whether you are a visitor to our web site, a potential shareholder, a current shareholder or even a former shareholder.

Collection of Information .  We may collect nonpublic personal information about you from the following sources:

 

•

Account applications and other forms, which may include your name, address and social security number, written and electronic correspondence and telephone contacts;

 

 

 

 

•

Web site information, including any information captured through our use of “cookies”; and

 

 

 

 

•

Account history, including information about the transactions and balances in your accounts with us or our affiliates.

Disclosure of Information .  We may share the information we collect with our affiliates.  We may also disclose this information as otherwise permitted by law.  We do not sell your personal information to third parties for their independent use.

Confidentiality and Security of Information .  We restrict access to nonpublic personal information about you to our employees and agents who need to know such information to provide products or services to you.  We maintain physical, electronic and procedural safeguards that comply with federal standards to guard your nonpublic personal information, although you should be aware that data protection cannot be guaranteed.

27


[Back Cover Page]

          This Prospectus sets forth concisely the information that a prospective investor should know before investing in Class Z Shares of Highland Equity Opportunities Fund (the “Fund”).  Please read and retain this Prospectus for future reference.  A Statement of Additional Information (“SAI”) regarding the Fund and dated ________ __, 2006, has been filed with the SEC.  This Prospectus incorporates by reference the entire SAI (together with any supplement to it).

          Additional information about the Fund’s investments will be available in the Fund’s annual and semi-annual reports to shareholders.  In the Fund’s annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund’s performance during its fiscal period just ended.

          The SAI and the Fund’s annual and semi-annual reports can be obtained without charge by calling (877) 665-1287.  The SAI is also available by visiting the Fund’s website (http://www.highlandfunds.com) or writing to the Fund, c/o PFPC Inc., P.O. Box 9840, Providence, RI 02940.

          Information about the Fund (including the SAI) can be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C.  Information about the Fund is available on the EDGAR Database on the SEC’s website at http://www.sec.gov .  Copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address:  publicinfo@sec.gov , or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-0102.

[Investment Co. Act
file number]

          YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE INTO THIS PROSPECTUS.  THE FUND HAS NOT AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION.  IF ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT.  THE FUND IS NOT MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.

28



Statement of Additional Information Dated ________, 2006

HIGHLAND EQUITY OPPORTUNITIES FUND
Class A, Class C and Class Z Shares

An investment portfolio of Highland Funds I

13455 Noel Road, Suite 800, Dallas, Texas 75240
(877) 665-1287

This Statement of Additional Information (“SAI”) is not a prospectus but provides additional information that should be read in conjunction with the Fund’s Prospectuses dated ________, 2006, and any supplements thereto.  Copies of the Fund’s Prospectuses are available, upon request, by calling the Fund at (877) 665-1287, visiting the Fund’s web site (http://www.highlandfunds.com) or writing to the Fund, c/o PFPC Inc., P.O. Box 9840, Providence, RI 02940.  Capitalized terms used in this SAI and not otherwise defined have the meanings given them in the Fund’s Prospectuses.

TABLE OF CONTENTS

 

Page

 

THE FUND

2

INVESTMENT POLICIES AND STRATEGIES

2

RISK FACTORS

3

INVESTMENT RESTRICTIONS

6

CONFLICTS OF INTEREST

7

MANAGEMENT

9

INVESTMENT ADVISORY SERVICES

15

SUB-ADVISER

15

ADMINISTRATOR/SUB-ADMINISTRATOR

16

ACCOUNTING SERVICES AGENT

17

DISTRIBUTOR

17

TRANSFER AGENT

18

CUSTODIAN

18

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

18

INFORMATION REGARDING PORTFOLIO MANAGER

20

PORTFOLIO TRANSACTIONS AND BROKERAGE

21

DESCRIPTION OF THE FUND’S SHARES

22

PROGRAMS FOR REDUCING OR ELIMINATING SALES CHARGES

23

INCOME TAX CONSIDERATIONS

25

APPENDIX  —  RATINGS CATEGORIES

30

1


THE FUND

          Highland Equity Opportunities Fund (the “Fund”) is a non-diversified, open-end management investment company.  The Fund was organized as a Delaware Statutory Trust on February 28, 2006.  The Fund offers three classes of shares:  Classes A, C and Z. 

INVESTMENT POLICIES AND STRATEGIES

          The following information supplements the discussion of the investment policies and strategies of the Fund described in the Prospectuses.  In pursuing its objective, the Fund will invest as described below and may employ the investment techniques described in the Prospectuses and elsewhere in this SAI.  The  investment objective of the Fund is a non-fundamental policy and thus may be changed by the Board of Trustees of the Fund without the approval of a “vote of a majority of the outstanding voting securities” of the Fund.  A “majority of the outstanding voting securities” means the approval of the lesser of (i) 67% or more of the shares at a meeting if the holders of more than 50% of the outstanding shares are present or represented by proxy or (ii) more than 50% of the outstanding shares.

           Portfolio turnover .   The frequency and amount of portfolio purchases and sales (known as the “turnover rate”) will vary from year to year.  It is anticipated that the Fund ‘s turnover rate will ordinarily be between 15% and 25%.  The portfolio turnover rate is not expected to exceed 35%, but may vary greatly from year to year and will not be a limiting factor when the Sub-Adviser deems portfolio changes appropriate.  Although the Fund generally does not intend to trade for short -term profits, the securities held by the Fund  will be sold whenever the Sub-Adviser believes it is appropriate to do so, without regard to the length of time a particular security may have been held.  Higher portfolio turnover involves correspondingly greater transaction costs and potentially greater income taxes including any brokerage  commissions, that the Fund will bear directly.

           Options.  The Sub-Adviser believes in the judicious use of derivative securities, primarily options.  The Sub-Adviser may purchase and write put and call options that are traded on national securities exchanges or over-the-counter markets, as well as on electronic communications networks (ECNs).  Options can be used in many ways such as to increase market exposure (leverage), to reduce overall market exposure (hedge), to increase the portfolio’s current income, or to reduce the cost basis of a new position.  The Fund may also utilize certain options, such as various types of index or “market basket” options, in an effort to hedge against certain market-related risks, as the Sub-Adviser deems appropriate.  The Sub-Adviser believes that the use of options and other derivatives should help reduce risk and enhance investment performance.

           Fixed Income Securities.   The Sub-Adviser may invest in fixed income securities (bonds) as part of the strategic operations of the Fund.  The Sub-Adviser may take advantage of special investment opportunities in the high yield and convertible segments of the fixed income market.  The Sub-Adviser considers convertible securities to be equity securities, with the expectation of providing both current income and capital appreciation.  The Sub-Adviser may also seek opportunities in government issued fixed-income securities as deemed appropriate.

           Leverage.   To a limited extent, the Fund may increase the number and extent of its “long” positions by borrowing (e.g., by purchasing securities on margin).  Entering into short sales also increases the Fund’s use of leverage.  The Sub-Adviser does not expect that the Fund will incur indebtedness in connection with its operations, other than interest on margin debts or deposits with respect to securities positions.

2


           Capital Structure Arbitrage .  The Sub-Adviser seeks to use Fund’s assets to exploit pricing inefficiencies in a firm’s capital structure.  This strategy will entail purchasing the undervalued security, and selling the overvalued, expecting the pricing disparity between the two to close out.

          Event-Driven Investments .  When the opportunity arises, the Fund may invest in companies based upon certain situations or events, such as launching of a new product, changes in management, a corporate restructuring, a merger or an acquisition.  These situations or events may also include investments that are based on market timing and impact analysis.

          Occasionally, the Fund may engage in arbitrage transactions that the Sub-Adviser believes represent an exceptional risk/reward opportunity.  Risk arbitrage opportunities generally arise during corporate mergers, leverage buyouts or takeovers.  Frequently the stock of the company being acquired will trade at a significant discount to the announced deal price.  This discount compensates investors for the time value of money and the risk that the transaction may be canceled.  If the discount is significantly greater than the Sub-Adviser’s assessment of the underlying risk, the strategy will be implemented.  As with short selling, options and fixed income securities, the Sub-Adviser intends to use event-driven investments as a tactical, opportunistic strategy and not as part of the Fund’s normal operations.

          Other Investments.   The Sub-Adviser may also invest some of the Fund’s assets in short-term United States Government obligations, certificates of deposit, commercial paper and other money market instruments, including repurchase agreements with respect to such obligations, to enable the Fund to make investments quickly and to serve as collateral with respect to certain of its investments.  If the Sub-Adviser, however, believes that a defensive position is appropriate because of expected economic or business conditions or the outlook for security prices a greater percentage of Fund assets may be invested in such obligations.  The Fund may also engage in securities lending activities.  From time to time, in the sole discretion of the Sub-Adviser, cash balances of the Fund may be placed in a money market fund.

           Limited Role in Affairs of Portfolio Companies.   Although the Sub-Adviser does not take an active role in the affairs of the companies in which the Fund has a position other than voting proxies with respect to the Fund’s portfolio holdings, it will be the policy of the Fund to take such steps as are necessary to protect its economic interests.  If the opportunity presents itself, the Sub-Adviser reserves the option for any of its directors, officers or employees to accept a role on the board of directors of any company, regardless of whether the Fund holds any of the company’s securities.

           Commodities and Financial Futures.  Neither Highland nor Prospect will trade commodities or financial futures on behalf of the Fund unless it becomes registered as a commodity pool operator with the Commodity Futures Trading Commission and becomes a member of the National Futures Association prior to conducting such trades or is eligible for an exemption from such registration and membership requirements. 

RISK FACTORS

           Operating Deficits .  The expenses of operating the Fund (including the fees payable to Highland) may exceed its income, thereby requiring that the difference be paid out of the Fund’s capital, reducing the Fund’s investments and potential for profitability.

           Accuracy of Public Information.   The Sub-Adviser selects investments for the Fund, in part, on the basis of information and data filed by issuers with various government regulators or made directly available to the Sub-Adviser by the issuers or through sources other than the issuers.  Although the Sub-Adviser evaluates all such information and data and ordinarily seeks independent corroboration when the Sub-Adviser considers it is appropriate and when it is reasonably available, the Sub-Adviser is not in a

3


position to confirm the completeness, genuineness or accuracy of such information and data, and in some cases, complete and accurate information is not available.

          Leverage.   When deemed appropriate by the Sub-Adviser and subject to applicable regulations, the Fund may use leverage in its investment program, including the use of borrowed funds and investments in certain types of options, such as puts, calls and warrants, which may be purchased for a fraction of the price of the underlying securities while giving the purchaser the full benefit of movement in the market of those underlying securities.  While such strategies and techniques increase the opportunity to achieve higher returns on the amounts invested, they also increase the risk of loss.  To the extent the Fund purchases securities with borrowed funds, its net assets will tend to increase or decrease at a greater rate than if borrowed funds are not used.  The level of interest rates generally, and the rates at which such funds may be borrowed in particular, could affect the operating results of the Fund.  If the interest expense on borrowings were to exceed the net return on the portfolio securities purchased with borrowed funds, the Fund’s use of leverage would result in a lower rate of return than if the Fund were not leveraged.

          If the amount of borrowings that the Fund may have outstanding at any one time is large in relation to its capital, fluctuations in the market value of the Fund’s portfolios will have disproportionately large effects in relation to the Fund’s capital and the possibilities for profit and the risk of loss will therefore be increased.  Any investment gains made with the additional monies borrowed will generally cause the net asset value of the Fund to rise more rapidly than would otherwise be the case.  Conversely, if the investment performance of the additional monies borrowed fails to cover their cost to the Fund, the net asset value of the Fund will generally decline faster than would otherwise be the case.

           Short Sales.   The Fund may sell securities short.  Short selling involves the sale of a security that the Fund does not own and must borrow in order to make delivery in the hope of purchasing the same security at a later date at a lower price.  In order to make delivery to its purchaser, the Fund must borrow securities from a third party lender.  The Fund subsequently returns the borrowed securities to the lender by delivering to the lender the securities it receives in the transaction or by purchasing securities in the open market.  The Fund must generally pledge cash with the lender equal to the market price of the borrowed securities.  This deposit may be increased or decreased in accordance with changes in the market price of the borrowed securities.  During the period in which the securities are borrowed, the lender typically retains its right to receive interest and dividends accruing to the securities , thus, if the issuer of securities that the Fund sells short pays interest or declares a dividend while the Fund is borrowing, it will bear the cost of such interest or dividend.   In exchange, in addition to lending the securities, the lender generally pays the Fund a fee for the use of the Fund’s cash.  This fee is based on prevailing interest rates, the availability of the particular security for borrowing and other market factors.

          Theoretically, securities sold short are subject to unlimited risk of loss because there is no limit on the price to which a security may appreciate before the short position is closed.  In addition, the supply of securities that can be borrowed fluctuates from time to time.  The Fund may be subject to losses if a security lender demands return of the lent securities and an alternative lending source cannot be found.

          Options .  The Fund may use a number of option strategies.  Put options and call options typically have similar structural characteristics and operational mechanics regardless of the underlying instrument on which they are purchased or sold.  A put option gives the purchaser of the option, upon payment of a premium, the right to sell, and the writer the obligation to buy, the underlying security, commodity, index, currency or other instrument at the exercise price.  A call option, upon payment of a premium, gives the purchaser of the option the right to buy, and the seller the obligation to sell, the underlying instrument at the exercise price.

4


          With certain exceptions, exchange listed options generally settle by physical delivery of the underlying security or currency, although in the future cash settlement may become available.  Index options are cash settled for the net amount, if any, by which the option is “in-the-money” (i.e., where the value of the underlying instrument exceeds, in the case of a call option, or is less than, in the case of a put option, the exercise price of the option) at the time the option is exercised.  Frequently, rather than taking or making delivery of the underlying instrument through the process of exercising the option, listed options are closed by entering into offsetting purchase or sale transactions that do not result in ownership of the new option.  The Fund’s ability to close out its position as a purchaser or seller of a listed put or call option is dependent, in part, upon the liquidity of the option market.

          Over-the-counter (“OTC”) options are purchased from, or sold to, securities dealers, financial institutions or other parties (“Counterparties”) through direct bilateral agreement with the Counterparty.  In contrast to exchange listed options, which generally have standardized terms and performance mechanics, all the terms of an OTC option, including such terms as method of settlement, term, exercise price, premium, guarantee, and security, are set by negotiation of the parties.  Unless the parties provide for it, there is no central clearing or guaranty function in an OTC option.  As a result, if the Counterparty fails to make or take delivery of the security, currency or other instrument underlying an OTC option it has entered into with the Fund or fails to make a cash settlement payment due in accordance with the terms of that option, the Fund will lose any premium it paid for the option as well as any anticipated benefit of the transaction.

          If a put or call option purchased by the Fund were permitted to expire without being sold or exercised, its premium would be lost by the Fund.  The risk involved in writing a put option is that there could be a decrease in the market value of the underlying security caused by rising interest rates or other factors.  If this occurred, the option could be exercised and the underlying security would then be sold to the Fund at a higher price than its current market value.  The risk involved in writing a call option is that there could be an increase in the market value of the underlying security caused by declining interest rates or other factors.  If this occurred, the option could be exercised and the underlying security would then be sold by the Fund at a lower price than its current market value.  Purchasing and writing put and call options and, in particular, writing “uncovered” options are highly specialized activities and entail greater than ordinary investment risks.

           Foreign Securities .  Although the Fund will invest largely through the United States securities markets, the Fund may invest a portion of its assets in securities of companies domiciled or operating in one or more foreign countries.  Investing in foreign securities involves considerations and possible risks not typically involved in investing in securities of companies domiciled and operating in the United States, including instability of some foreign governments, the possibility of expropriation, limitations on the use or removal of funds or other assets, foreign currency risk, changes in governmental administration or economic or monetary policy (in the United States or abroad) or changed circumstances in dealings between nations.  The application of foreign tax laws (e.g., the imposition of withholding taxes on dividend or interest payments) or confiscatory taxation may also affect investment in foreign securities.  Higher expenses may result from investment in foreign securities than would result from investment in domestic securities because of the costs that must be incurred in connection with conversion between various currencies and foreign brokerage commissions that may be higher than in the United States.  Foreign securities markets also may be less liquid, more volatile and subject to less governmental supervision than in the Unites States, including lack of uniform accounting, auditing and financial reporting standards and potential difficulties in enforcing contractual obligations.

           Trading Limitations .  For all securities listed on a securities exchange, including options listed on a public exchange, the exchange generally has the right to suspend or limit trading under certain circumstances.  Such suspensions or limits could render certain strategies difficult to complete or continue

5


and subject the Fund to loss.  Also, such a suspension could render it impossible for the Sub-Adviser to liquidate positions and thereby expose the Fund to potential losses.

INVESTMENT RESTRICTIONS

          The investment restrictions below have been adopted by the Board of Trustees.  If a percentage policy set forth in the Prospectus or one of the following percentage investment restrictions is adhered to at the time a transaction is effected, later changes in a percentage will not be considered a violation of the policy or restriction unless such change is caused by action of the Fund.

Fundamental Investment Restrictions .  The following investment restrictions are fundamental policies and may not be changed without the approval of a “majority of the outstanding voting securities” (as previously defined).  The Fund:

          1.          May not purchase any security that would cause the Fund to concentrate its investments in the securities of issuers primarily engaged in any particular industry, except as permitted by the Securities and Exchange Commission;

          2.          May not issue senior securities, except as permitted under the Investment Company Act of 1940 or any rule, order or interpretation thereunder;

          3.          May not borrow money, except to the extent permitted by applicable law;

          4.          May not underwrite securities of other issuers, except to the extent that the Fund, in disposing of Fund securities, may be deemed an underwriter within the meaning of the Securities Act of 1933;

          5.          May not purchase or sell real estate, except that, to the extent permitted by applicable law, the Fund may (a) invest in securities or other instruments directly or indirectly secured by real estate, (b) invest in securities or other instruments issued by issuers that invest in real estate, and (c) hold for prompt sale, real estate or interests in real estate to which it may gain an ownership interest through the forfeiture of collateral securing loans or debt securities held by it;

          6.          May not purchase or sell commodities or commodity contracts unless acquired as a result of ownership of securities or other instruments issued by persons that purchase or sell commodities or commodities contracts; but this shall not prevent the Fund from purchasing, selling and entering into financial futures contracts (including futures contracts on indices of securities, interest rates and currencies), options on financial futures contracts (including futures contracts on indices of securities, interest rates and currencies), warrants, swaps, forward contracts, foreign currency spot and forward contracts or other derivative instruments that are not related to physical commodities; and

          7.          May make loans to other persons, in accordance with the Fund’s investment objective and policies and to the extent permitted by applicable law.

Non-Fundamental Investment Restrictions .  The Fund is also subject to the following investment restrictions and policies that may be changed by the Board of Trustees of the Fund without shareholder approval.  The Fund may not:

          1.          Acquire any illiquid securities, such as repurchase agreements with more than seven calendar days to maturity or fixed time deposits with a duration of over seven calendar days, if as a result

6


thereof, more than 15% of the market value of the Fund’s net assets would be in investments that are illiquid; and

          2.          Acquire securities of other investment companies, except as permitted by the Investment Company Act of 1940 or any rule, order or interpretation thereunder.

CONFLICTS OF INTEREST

           Policy on Disclosure of Portfolio Holdings.   The Fund’s uncertified complete list of portfolio holdings information may be provided regularly pursuant to a standing request, such as on a monthly or quarterly basis, to (i) third party service providers, rating and ranking agencies, financial advisors and affiliated persons of the Fund and (ii) clients of the Adviser or its affiliates that invest in the Fund or such clients’ consultants.  No compensation or other consideration is received by the Fund or the Adviser, or any other person for these disclosures.  A list of the entities that receive the Fund’s portfolio holdings information on such basis, the frequency with which it is provided to them and the length of the lag between the date of the information and the date it is disclosed is provided below:

MorningStar Inc.

Monthly

30 days after month end

Lipper, Inc.

Monthly

30 days after month end

Thomson Financial

Monthly

30 days after month end

          In addition, certain service providers to the Fund or the Adviser, Sub-Adviser, Transfer Agent or Distributor may for legitimate business purposes receive the Fund’s portfolio holdings information earlier than 30 days after month end, such as rating and ranking agencies, pricing services, proxy voting service providers, accountants, attorneys, custodians, securities lending agents, brokers in connection with Fund transactions and in providing pricing quotations, members of a bank syndicate providing a committed line of credit to the Fund, transfer agents and entities providing CDSC financing.  If the Fund redeems a shareholder in kind, the shareholder generally receives its proportionate share of the Fund’s portfolio holdings and, therefore, the shareholder and its agent may receive such information earlier than 30 days after month end.  Such holdings are released on conditions of confidentiality, which include appropriate trading prohibitions.  “Conditions of confidentiality” include confidentiality terms included in written agreements, implied by the nature of the relationship (e.g., attorney-client relationship), or required by fiduciary or regulatory principles (e.g., custody services provided by financial institutions).  Disclosure of the Fund’s portfolio securities as an exception to the Fund’s normal business practice requires a Fund officer (other than the Treasurer) to identify a legitimate business purpose for the disclosure and submit the proposal to the Fund’s Treasurer for approval following business and compliance review.  Additionally, no compensation or other consideration is received by the Fund, or the Adviser or the Sub-Adviser, or any other person for these disclosures.  The Fund’s Trustees will review annually a list of such entities that have received such information, the frequency of such disclosures and the business purpose therefor.  These procedures are designed to address conflicts of interest between the Fund’s shareholders on the one hand and the Fund’s Adviser, the Sub-Adviser or any affiliated person of the Fund or such entities on the other hand by creating a structured review and approval process which seeks to ensure that disclosure of information about the Fund’s portfolio securities is in the best interests of the Fund’s shareholders.  There can be no assurance, however, that the Fund’s policies and procedures with respect to the disclosure of portfolio holdings information will prevent the misuse of such information by individuals or firms in possession of such information.

          Portfolio holdings of the Fund will be disclosed on a quarterly basis on forms required to be filed with the SEC as follows: (i) portfolio holdings as of the end of each fiscal year will be filed as part of the annual report filed on Form N-CSR; (ii) portfolio holdings as of the end of the first and third fiscal quarters will be filed on Form N-Q; and (iii) portfolio holdings as of the end of the six month period will

7


be filed as part of the semi-annual report filed on Form N-CSR.  The Trust’s Form N-CSRs and Form N-Qs will be available on the Fund’s website www.highlandfunds.com and on the SEC website at www.sec.gov . 

          The Fund’s top ten holdings also are posted on www.highlandfunds.com no sooner than 15 days after the end of each month.  One day after this information has been made available to the public by means of posting on that website, it may also be included in other advertising and marketing material concerning the Fund.

                    Finally, the Fund releases information concerning any and all portfolio holdings when required by law.  Such releases may include providing information concerning holdings of a specific security to the issuer of such security.

8


MANAGEMENT

          The Board of Trustees (the “Board”) provides broad oversight over the operations and affairs of the Fund.  The Board has overall responsibility to manage and control the business affairs of the Fund, including the complete and exclusive authority to establish policies regarding the management, conduct and operation of the Fund’s business.  The names, addresses and ages of the Trustees and officers of the Fund, the year each was first elected or appointed to office, their principal business occupations during the last five years, the number of funds overseen by each Trustee and other directorships or trusteeships they hold are shown below. 

Name, Address
and Age

 

Position
with Fund

 

Term of Office and Length of Time Served

 

Principal Occupation(s)
During Past Five Years

 

Number of Portfolios in Highland Fund Complex Overseen
by Trustee 1

 

Other Directorships/ Trusteeships
Held

 

 

 

 

 

INDEPENDENT TRUSTEES

 

 

 

 

 

 

 

 

 

 

 

Timothy K. Hui
(Age 55)
 c/o Highland Capital Management, L.P.
13455 Noel Road, Suite 800
Dallas, TX 75240

 

Trustee

 

Indefinite Term; Trustee since inception in 2006

 

Assistant Provost for Graduate Education since July 2004; Assistant Provost for Educational Resources, July 2001 to June 2004, Philadelphia Biblical University.

 

10

 

None

 

 

 

 

 

 

 

 

 

 

 

Scott F. Kavanaugh
 (Age 43)
c/o Highland Capital Management, L.P.
13455 Noel Road, Suite 800
Dallas, TX 75240

 

Trustee

 

Indefinite Term; Trustee since inception in 2006

 

Private Investor; Executive at Provident Funding Mortgage Corporation, February 2003 to July 2003; Executive Vice President, Director and Treasurer, Commercial Capital Bank, January 2000 to February 2003; Managing Principal and Chief Operating Officer, Financial Institutional Partners Mortgage Company and the Managing Principal and President of Financial Institutional Partners, LLC, (an investment banking firm), April 1998 to February 2003.

 

10

 

None

9


 

Name, Address
and Age

 

Position
with Fund

 

Term of Office and Length of Time Served

 

Principal Occupation(s)
During Past Five Years

 

Number of Portfolios in Highland Fund Complex Overseen
by Trustee 1

 

Other Directorships/ Trusteeships
Held

 

 

 

 

 

James F. Leary
(Age 75)
 c/o Highland Capital Management, L.P.
13455 Noel Road, Suite 800
Dallas, TX 75240

 

Trustee

 

Indefinite Term; Trustee since inception in 2006

 

Managing Director, Benefit Capital Southwest, Inc., (a financial consulting firm) since January 1999.

 

10

 

Board Member of Capstone Series Fund, Inc. (3 portfolios); Pacesetter/MVHC Inc. (small business investment company)

 

 

 

 

 

 

 

 

 

 

 

Bryan A. Ward
(Age 49)
c/o Highland Capital Management, L.P.
13455 Noel Road, Suite 800
Dallas, TX 75240

 

Trustee

 

Indefinite Term; Trustee since inception in 2006

 

Senior Manager, Accenture, LLP since January 2002; Special Projects Advisor, Accenture, LLP with focus on the oil and gas industry, September 1998 to December 2001.

 

10

 

None

 

 

 

 

 

 

 

 

 

 

 

INTERESTED TRUSTEE 2

 

 

 

 

 

 

 

 

 

 

 

R. Joseph Dougherty (Age 34)
c/o Highland Capital Management, L.P.
13455 Noel Road, Suite 800
Dallas, TX 75240

 

Trustee

 

Indefinite Term; Trustee and Chairman of the Board since inception in 2006

 

Portfolio Manager of the Adviser since 2000.

 

10

 

None

10


OFFICERS

Name, Address
and Age

 

Position
with Fund

 

Term of Office and Length of Time Served

 

Principal Occupation(s)
During Past Five Years

 

 

 

James D. Dondero
(Age 42)
c/o Highland Capital Management, L.P.
13455 Noel Road, Suite 800
Dallas, TX 75240

 

Chief Executive Officer and President

 

Indefinite; President since inception in 2006

 

President and Managing Partner of the Adviser.

 

 

 

 

 

 

 

R. Joseph Dougherty
(Age 34)
c/o Highland Capital Management, L.P.
13455 Noel Road, Suite 800
Dallas, TX 75240

 

Senior Vice President

 

Indefinite; Senior Vice-President since inception in 2006

 

Portfolio Manager of the Adviser since 2000.

 

 

 

 

 

 

 

Mark Okada
(Age 44)
c/o Highland Capital Management, L.P.
13455 Noel Road, Suite 800
Dallas, TX 75240

 

Executive Vice President

 

Indefinite; Executive Vice President since inception in 2006

 

Chief Investment Officer of the Adviser.

 

 

 

 

 

 

 

M. Jason Blackburn
(Age 29)
c/o Highland Capital Management, L.P.
13455 Noel Road, Suite 800
Dallas, TX 75240

 

Secretary, Chief Financial Officer and Treasurer

 

Indefinite; Secretary, Chief Financial Officer and Treasurer since inception in 2006

 

Assistant Controller of the Adviser since November 2001; Accountant, KPMG LLP, September 1999 to October 2001.

 

 

 

 

 

 

 

Michael S. Minces
(Age 30)
c/o Highland Capital Management, L.P.
13455 Noel Road, Suite 800
Dallas, TX 75240

 

Chief Compliance Officer

 

Indefinite; Chief Compliance Officer since inception in 2006

 

Associate, Akin Gump Strauss Hauer & Feld LLP (law firm), October 2003 to August 2004; Associate, Skadden, Arps, Slate, Meagher & Flom LLP (law firm), October 2000 to March 2003.


1

The Highland Fund Complex consists of the following funds: Highland Floating Rate Limited Liability Company, Highland Floating Rate Fund, Highland Floating Rate Advantage Fund, Highland Institutional Floating Rate Income Fund, Highland Corporate Opportunities Fund,  Restoration Opportunities Fund, Prospect Street ® High Income Portfolio Inc., Prospect Street ® Income Shares Inc., Highland Equity Opportunities Fund, and Highland Real Estate Fund (each a “Highland Fund” and collectively the “Highland Funds”).

2

Mr. Dougherty is deemed to be an “interested person” of the Fund under the 1940 Act because of his position with the Adviser.

3

Each officer also serves in the same capacity for each of the Highland Funds.

11


          Trustees’ Compensation.   The officers of the Fund and those of its Trustees who are “interested persons” (as defined in the 1940 Act) of the Fund receive no direct remuneration from the Fund.  The following table sets forth the aggregate compensation paid to each of the Independent Trustees by the Fund and the total compensation paid to each of the Trustees by the Highland Fund Complex for the calendar year ended December 31, 2005. 

Name of  Trustee

 

Aggregate Compensation
From the Fund

 

Total Compensation From
 the Highland Fund Complex

 

 

 

 

Interested Trustee

 

 

 

 

 

 

 

R. Joseph Dougherty

 

 

$0

 

$

0

 

Independent Trustee

 

 

 

 

 

 

 

Timothy K. Hui

 

 

$0

 

$

90,000

 

Scott F. Kavanaugh

 

 

$0

 

$

90,000

 

James F. Leary

 

 

$0

 

$

90,000

 

Bryan A. Ward

 

 

$0

 

$

90,000

 

          Role of the Board of Trustees. The Trustees of the Fund are responsible for the overall management and supervision of the Fund’s affairs and for protecting the interests of the shareholders.  The Trustees meet periodically throughout the year to oversee the Fund’s activities, review contractual arrangements with service providers for the Fund and review the Fund’s performance.  The Fund will have three committees, the Audit Committee, the Nominating Committee and the Litigation Committee, each of which is composed of the Independent Trustees.

           Audit Committee.   Pursuant to the Audit Committee Charter adopted by the Fund’s Board of Trustees, the function of the Audit Committee is (1) to oversee the Fund’s accounting and financial reporting processes and the audits of the Fund’s financial statements and (2) to assist in Board oversight of the integrity of the Fund’s financial statements, the Fund’s compliance with legal and regulatory requirements, and the independent registered public accounting firm’s qualifications, independence and performance.  The Audit Committee is comprised of Messrs. Hui, Kavanaugh, Leary and Ward.

           Nominating Committee .  The Nominating Committee’s function is to canvass, recruit, interview, solicit and nominate Trustees.  The Nominating Committee will consider recommendations for nominees from shareholders sent to the Secretary of the Fund, 13455 Noel Road, Suite 800, Dallas, Texas 75240.  A nomination submission must include all information relating to the recommended nominee that is required to be disclosed in solicitations or proxy statements for the election of Trustees, as well as information sufficient to evaluate the factors listed above.  Nomination submissions must be accompanied by a written consent of the individual to stand for election if nominated by the Board of Trustees and to serve if elected by the shareholders, and such additional information must be provided regarding the recommended nominee as reasonably requested by the Nominating Committee.  The Audit Committee is comprised of Messrs. Hui, Kavanaugh, Leary and Ward.

           Litigation Committee .  The Litigation Committee’s function is to seek to address any potential conflicts of interest between or among the Fund, the Sub-Adviser and the Adviser in connection with any potential or existing litigation or other legal proceeding relating to securities held by the Fund and the

12


Sub-Adviser or the Adviser or another client of the Sub-Adviser or the Adviser.  The Audit Committee is comprised of Messrs. Hui, Kavanaugh, Leary and Ward.

          Qualified Legal Compliance Committee.   The Qualified Legal Compliance Committee (“QLCC”) is charged with compliance with Rules 205.2(k) and 205.3(c) of the Code of Federal Regulations regarding alternative reporting procedures for attorneys representing the Fund who appear and practice before the SEC on behalf of the Fund.  The QLCC is comprised of Messrs. Hui, Kavanaugh, Leary and Ward.

           Share Ownership . The following table shows the dollar range of equity securities beneficially owned by the Fund’s Trustees in the Fund and the aggregate dollar range of equity securities owned by the Fund’s Trustees in all Funds overseen by the Trustee in the Highland Fund Complex as of August 31, 2005.

Name of  Trustee

 

Dollar Range of Equity
Securities Owned
in the Fund

 

Aggregate Dollar Range of Equity
Securities Owned in All Funds Overseen
by Trustee in the Highland Fund Complex

 

 

 

 

R. Joseph Dougherty

 

 

$0

 

 

over $100,000

 

Timothy K. Hui

 

 

$0

 

 

$1 - $10,000

 

Scott F. Kavanaugh

 

 

$0

 

 

$10,001 - $50,000

 

James F. Leary

 

 

$0

 

 

$10,001 - $50,000

 

Bryan A. Ward

 

 

$0

 

 

$1 - $10,000

 

          Trustee Positions.   As of February 28, 2006, no Independent Trustee or any of his immediate family members owned beneficially or of record any class of securities of the Adviser or any person controlling, controlled by or under common control with any such entity.

           Code of Ethics .  The Fund, the Adviser and the Sub-Adviser have each adopted codes of ethics that essentially prohibit certain of their personnel, including the Fund’s portfolio manager, from engaging in personal investments that compete or interfere with, or attempt to take advantage of a client’s, including the Fund’s, anticipated or actual portfolio transactions, and are designed to assure that the interests of clients, including Fund shareholders, are placed before the interests of personnel in connection with personal investment transactions.  Under the codes of ethics for the Fund, the Adviser and the Sub-Adviser personal trading is permitted by such persons subject to certain restrictions; however, they are generally required to pre-clear most securities transaction’s with the appropriate compliance officer and to report all transactions on a regular basis. 

           Anti-Money Laundering Compliance .  The Fund or its service providers may be required to comply with various anti-money laundering laws and regulations.  Consequently, the Fund or its service providers may request additional information from you to verify your identity.  If at any time the Fund believes a shareholder may be involved in suspicious activity or if certain account information matches information on government lists of suspicious persons, the Fund may choose not to establish a new account or may be required to “freeze” a shareholder’s account.  The Fund or its service providers also may be required to provide a governmental agency with information about transactions that have occurred in a shareholder’s account or to transfer monies received to establish a new account, transfer an existing

13


account or transfer the proceeds of an existing account to a governmental agency.  In some circumstances, it may not be permitted  to inform the shareholder that it has taken the actions described above.

           Proxy Voting Policies .  The Fund has delegated voting of proxies in respect of portfolio holdings to the Sub-Adviser, to vote the Fund’s proxies in accordance with the Sub-Adviser’s proxy voting guidelines and procedures.  The Sub-Adviser has adopted a proxy voting policy (the “Policy”) and proxy voting guidelines (the “Guidelines”) that provide as follows:

 

•

The Sub-Adviser votes proxies in respect of the Fund’s securities in the Fund’s best economic interests and without regard to the interests of the Sub-Adviser or any client of the Sub-Adviser.

 

 

 

 

•

Unless the Sub-Adviser’s Proxy Voting Committee (the “Committee”) otherwise determines (and documents the basis for its decisions) or as otherwise provided by the Policy, the Sub-Adviser votes proxies in a manner consistent with the Guidelines.

 

 

 

 

•

To avoid material conflicts of interest, the Sub-Adviser applies the Guidelines in an objective and consistent manner across the Fund’s account.  Where a material conflict of interest has been identified and the matter is covered by the Guidelines, the Committee votes in accordance with the Guidelines.  For the Fund, where a conflict of interest has been identified and the matter is not covered in the Guidelines, the Sub-Adviser will disclose to the Fund’s Board the conflict and the Committee’s determination of the matter in which to vote.

 

 

 

 

•

The Sub-Adviser also may determine not to vote proxies in respect of securities of the Fund if it determines it would be in the Fund’s overall best interests not to vote.

          The Guidelines also address how the Sub-Adviser will vote proxies on particular types of matters such as corporate governance matters, disclosure of executive compensation and share repurchase programs.  For example, the Sub-Adviser generally will:

 

•

Vote in elections of directors on a case-by-case basis;

 

 

 

 

•

Support proposals seeking increased disclosure of executive compensation; and

 

 

 

 

•

Support management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms.

          The Fund’s proxy voting record for the most recent 12-month period ending June 30 will be available (1) without charge, upon request, by calling (972) 383-8000 and (2) on the SEC’s web site (http://www.sec.gov).  Information as of June 30 th each year will generally be available on or about the following September 1 st . 

14


INVESTMENT ADVISORY SERVICES

          Highland serves as the Fund’s investment adviser pursuant to an Investment Advisory Agreement with the Fund (the “Advisory Agreement”).  Highland is controlled by James Dondero and Mark Okada, by virtue of their respective share ownership, and its general partner, Strand Advisors, Inc., of which Mr. Dondero is the sole stockholder.  Under the Advisory Agreement, Highland receives from the Fund a monthly fee, computed and accrued daily, at the annual rate of 2.25% of the “Average Daily Managed Assets” of the Fund.  “Average Daily Managed Assets” of the Fund shall mean the average daily value of the total assets of the Fund, less all accrued liabilities of the Fund (other than the aggregate amount of any outstanding borrowings constituting financial leverage).

          Highland carries out its duties under the Advisory Agreement at its own expense.  The Fund will pay its own ordinary operating and activity expenses, such as legal and auditing fees, management fees, administrative fees, custodial fees, transfer agency fees, the cost of communicating with shareholders and registration fees, as well as other operating expenses such as interest, taxes, brokerage, insurance, bonding, compensation of Independent Trustees of the Fund and extraordinary expenses.

          The Advisory Agreement provides that in the absence of willful misfeasance, bad faith or gross negligence in the performance (or reckless disregard) of its obligations or duties thereunder on the part of Highland, Highland shall not be subject to liability to the Fund party to such agreements or to any shareholder of the Fund for any error of judgment or mistake of law, for any loss arising out of any investment or for any act or omission in the execution and management of the Fund.

          Prospect, the Fund’s Sub-Adviser described below, and Highland and/or its general partner, limited partners, officers, affiliates and employees provide investment advice to other parties and manage other accounts and private investment vehicles similar to the Fund.  In connection with such other investment management activities, the Sub-Adviser, the Adviser and/or general partner, limited partners, officers, affiliates and employees may decide to invest the funds of one or more other accounts or recommend the investment of funds by other parties, rather than the Fund’s monies, in a particular security or strategy.  In addition, the Sub-Adviser, the Adviser and such other persons will determine the allocation of funds from the Fund and such other accounts to investment strategies and techniques on whatever basis they consider appropriate or desirable in their sole and absolute discretion.

SUB-ADVISER

          Prospect Management Advisers, L.P., 13455 Noel Road, Suite 1300, Dallas, Texas 75240 (“Prospect” or “Sub-Adviser”), a wholly-owned subsidiary of Highland, has entered into a Sub-Advisory Agreement with Highland, on behalf of the Fund.  Pursuant to the Sub-Advisory Agreement, Prospect will provide the day-to-day management of the Fund’s portfolio of securities, which includes buying and selling securities for the Fund and investment research.  The Sub-Adviser also provides personnel to the Fund.

          For such services the Sub-Advisory Agreement provides that the fee paid by the Adviser to the Sub-Adviser will consist of two components:  (1)  a base fee of 1.00% of the Fund’s average daily net assets during the previous month (“Base Fee”), plus or minus (2)  a performance-fee adjustment (“Performance Adjustment”) calculated monthly by applying a variable rate of up to a maximum of 0.15% (positive or negative) to the Fund’s average daily net assets during the applicable performance measurement period.  The performance measurement period generally will be a rolling 18-month period, although no Performance Adjustment will be made until the Fund has been operational for at least

15


12 months, and accordingly, only the Base Fee rate will apply for the initial 12 months.  Once the Fund has been operational for at least 12 months, but less than 18 months, the performance measurement period will be equal to the time that has elapsed since the Fund’s commencement of operations.

          The Performance Adjustment may result in an increase or decrease in the sub-advisory fee paid by Highland, depending upon the investment performance of the Fund relative to its benchmark index, the S&P 500 Index (the “Index”), over the performance measurement period.  No Performance Adjustment will be applied unless the difference between the Fund’s investment performance and the investment record of the S&P 500 Index is 1.00% or greater (positive or negative) during the applicable performance measurement period.  If during the applicable performance measurement period the Fund’s investment performance were:

          (i)          at least 1.00% (but less than 2.50%) greater (positive or negative) than the investment record of the Index, then the Performance Adjustment would be 0.05% (positive or negative, respectively);

          (ii)          at least 2.50% (but less than 4.50%) greater (positive or negative) than the investment record of  the Index, then the Performance Adjustment would be 0.10% (positive or negative, respectively); or

          (iii)          at least 4.50% greater (positive or negative) than the investment record of the Index, then the Performance Adjustment would be 0.15% (positive or negative, respectively).

          Performance of a Fund is calculated net of expenses; whereas, the S&P 500 Index does not have any fees or expenses.  Reinvestments of dividends and distributions are included in calculating both the performance of the Fund and the S&P 500 Index.

          The investment performance of Class Z Shares will be used for purposes of calculating the Fund’s Performance Adjustment.  After Highland determines whether the Fund’s performance was above or below the S&P 500 Index by comparing the investment performance of the Class Z Shares against the investment record of the S&P 500 Index, Highland will apply the same Performance Adjustment (positive or negative) across each other class of shares of the Fund.

          In addition, Highland and Prospect have entered into a waiver agreement pursuant to which Prospect has agreed to waive 0.50% of its fee determined pursuant to the Sub-Advisory Agreement.  This agreement shall remain in effect until terminated by Highland.

ADMINISTRATOR/SUB-ADMINISTRATOR

          Under an administration agreement dated __________ 2006, Highland also provides administration services to the Fund, provides executive and other personnel necessary to administer the Fund and furnishes office space.  Highland receives a monthly administration fee from the Fund, computed and accrued daily, at an annual rate of 0.20% of the Fund’s average daily managed assets.  The Fund pays all expenses other than those paid by Highland, including but not limited to printing and postage charges, securities registration and custodian fees.  Under a separate sub-administration agreement, dated ___________ 2006, Highland has delegated certain administrative functions to PFPC Inc. (“PFPC”), 760 Moore Road, King of Prussia, Pennsylvania 19406, at an annual rate, payable by Highland, of 0.01% of the Fund’s average daily managed assets. 

16


ACCOUNTING SERVICES AGENT

          PFPC, 101 Sabin Street, Pawtucket, RI, 02860, provides accounting services to the Fund pursuant to an accounting services agreement dated ______________, 2006.  [Basis for compensation to be provided by pre-effective amendment.] 

DISTRIBUTOR

          Fund shares are offered for sale through PFPC Distributors, Inc. (the “Distributor”), 760 Moore Road, King of Prussia, Pennsylvania 19406. 

           Distribution and Service Fees.   In addition to a Contingent Deferred Sales Charge (“CDSC”), each of Class A and Class C is authorized under a distribution plan (“Plan”) to use its respective assets to finance certain activities relating to the distribution of shares to investors.  These include marketing and other activities to support the distribution of the Class A and Class C shares and the services provided to you by your financial advisor.  The Plan was approved and reviewed in a manner consistent with Rule 12b-1 under the 1940 Act, which regulates the manner in which an open-end investment company may directly or indirectly bear the expenses of distributing its shares. 

          Beginning on the 13 th month after purchase, the Plan requires the payment of a monthly service fee to the Distributor at the annual rate not to exceed 0.25% of the average daily net assets attributable to Class A and Class C shares of the Fund. The Plan also requires the payment of a monthly distribution fee to the Distributor on an annual basis, not to exceed 0.10% of the average daily net assets attributable to Class A Shares and 0.75% of the average daily net assets of its Class C Shares.  Because the distribution and service fees are payable regardless of the Distributor’s expenses, the Distributor may realize a profit from the fees.  The Plan authorizes any other payments by the Fund to the Distributor and its affiliates to the extent that such payments might be construed to be indirect financing of the distribution of Fund shares.  In addition, Highland may, from time to time, at its expense out of its own financial resources, and/or the Distributor may, from time to time, out of any amounts received from the Fund pursuant to the Plan, make cash payments to dealer firms as an incentive to sell shares of the Fund and/or to promote retention of their customers’ assets in the Fund.  Such cash payments may be calculated on sales of shares of the Fund (“Sales-Based Payments”) or on the average daily net assets of the Fund attributable to that particular dealer (“Asset-Based Payments”).  Each of the Distributor and/or Highland may agree to make such cash payments to a dealer firm in the form of either or both Sales-Based Payments and Asset-Based Payments.  The Distributor and/or Highland may also make other cash payments to dealer firms in addition to or in lieu of Sales-Based Payments and Asset-Based Payments, in the form of payment for travel expenses, including lodging, incurred in connection with trips taken by qualifying registered representatives of those dealer firms and their families to places within or outside the United States; meeting fees; entertainment; transaction processing and transmission charges; advertising or other promotional expenses; or other expenses as determined in the Distributor’s or Highland’s discretion, as applicable.  In certain cases these other payments could be significant to the dealer firms.  Any payments described above will not change the price paid by investors for the purchase of the Fund’s shares or the amount that the Fund will receive as proceeds from such sales.  Each of the Distributor and/or Highland determines the cash payments described above in its discretion in response to requests from dealer firms, based on factors it deems relevant.  Dealers may not use sales of the Fund’s shares to qualify for any incentives to the extent that such incentives may be prohibited by law.  Amounts paid by Highland to any dealer firm in connection with the distribution of any Fund shares will count towards the cap imposed by the National Association of Securities Dealers, Inc. on underwriter compensation in connection with the public offering of securities.

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          The Trustees believe that the Plan could be a significant factor in the growth and retention of Fund assets resulting in a more advantageous expense ratio and increased investment flexibility which could benefit each class of Fund shareholders.  The Plan will continue in effect from year to year so long as continuance is specifically approved at least annually by a vote of the Trustees, including the Independent Trustees who have no direct or indirect financial interest in the operation of the Plan or in any agreements related to the Plan, cast in person at a meeting called for the purpose of voting on the Plan.  The Plan may not be amended to increase the fee materially without approval by a “vote of a majority of the outstanding voting securities” of the relevant class of shares and all material amendments of the Plan must be approved by the Trustees in the manner provided in the foregoing sentence.  The Plan may be terminated at any time by a vote of a majority of the Independent Trustees or by a “vote of a majority of the outstanding voting securities” of the relevant class of shares.  While the Plan is in effect, the Trust shall satisfy the “fund governance standards” as defined in Rule 0-1(a)(7) under the 1940 Act.  It should be noted, however, that in August 2005 the Court of Appeals for the District of Columbia Circuit stayed the January 16, 2006 effective date of subparagraphs (i) and (iv) of Rule 0-1(a)(7), which provisions require that a fund Board have at least 75% of its members independent and an independent Board Chairman, respectively.)

           Contingent Deferred Sales Charges (“CDSCs”) .  Certain investments in Class A and Class C Shares are subject to a CDSC.  You will pay the CDSC only on shares you submit for redemption within a prescribed amount of time after purchase.  The CDSC generally declines each year until there is no charge for redeemed shares.  The CDSC is applied to the NAV at the time of purchase or redemption, whichever is lower.  For purposes of calculating the CDSC, the start of the holding period is the day on which the purchase was made.  Shares you purchase with reinvested dividends or capital gains are not subject to a CDSC.  When shares are redeemed, the Fund will automatically redeem those shares not subject to a CDSC and then those you have held the longest.]  This policy helps reduce and possibly eliminate the potential impact of the CDSC.  In certain circumstances, CDSCs may be waived, as described  below under “Waiver of CDSC.”

TRANSFER AGENT

          PFPC, Inc., located at 101 Sabin Street, Pawtucket, RI, 02860, provides transfer agency and dividend disbursing agent services for the Fund.  As part of these services, PFPC, Inc. maintains records pertaining to the sale, redemption, and transfer of Fund shares and distributes the Fund’s cash distributions to shareholders. 

CUSTODIAN

          PFPC Trust Company, located at 8800 Tinicum Boulevard, Philadelphia, Pennsylvania, 19153, is the custodian for the Fund.  PFPC Trust Company is responsible for holding all securities, other investments and cash; receiving and paying for securities purchased; delivering against payment securities sold; receiving and collecting income from investments; making all payments covering expenses; and performing other administrative duties, all as directed by authorized persons.  PFPC Trust Company does not exercise any supervisory function in such matters as purchase and sale of portfolio securities, payment of dividends, or payment of expenses. 

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

          The independent registered public accounting firm for the Fund is PricewaterhouseCoopers LLP, located at 125 High Street, Boston, MA 02110.  The independent registered public accounting firm audits

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and reports on the annual financial statements, reviews certain regulatory reports and the federal income tax returns, and performs other professional accounting, auditing and tax services when engaged to do so. 

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INFORMATION REGARDING PORTFOLIO MANAGEMENT TEAM

          The Fund’s portfolio is managed by a portfolio management team.  The members of the team who are primarily responsible for the day-to-day management of the Fund’s portfolio are [          ].   The following table provides information about funds and accounts, other than the Fund, for which the Fund’s portfolio management team is primarily responsible for the day-to-day portfolio management as of [date] .

Type of Accounts

 

 Total
# of
Accounts
Managed

 

Total Assets
(millions)

 

# of Accounts
Managed with
Performance-
Based Advisory
Fee

 

Total Assets with
Performance-
Based Advisory
Fee (millions)

 

 

 

 

Registered Investment Companies:

 

 

 

 

 

 

 

 

Other Pooled Investment Vehicles:

 

 

 

 

 

 

 

 

Other Accounts:

 

 

 

 

 

 

 

 

           Conflicts of Interests.   [Description of any conflicts of interest that may arise to be filed by pre-effective amendment.]

           Compensation.   Prospect’s financial arrangements with its portfolio management team members, its competitive compensation and its career path emphasis at all levels reflect the value senior management places on key resources.  Compensation may include a variety of components and may vary, from year to year based on a number of factors, including the relative performance of a team member’s underlying account, the combined performance of the team member’s underlying accounts, and the relative performance of the team member’s underlying accounts measured against other employees’ accounts.  The principal components of compensation include a base salary, a discretionary bonus, and various retirement benefits.

           Base compensation . Generally, portfolio management team members receive base compensation based on their seniority and/or their position with the firm, which may include the amount of assets supervised and other management roles within the firm. 

           Discretionary compensation . In addition to base compensation, a portfolio management team member may receive a discretionary cash bonus as well as discretionary profit sharing contributions to his or her 401(k). 

          Senior portfolio management team members who perform additional management functions may receive additional compensation in these other capacities.  Compensation is structured such that key professionals benefit from remaining with the firm.

          The portfolio management team members do not currently own any shares of the Fund, the public offering of which is expected to commence on or about the date of this SAI.

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PORTFOLIO TRANSACTIONS AND BROKERAGE

           Selection of Broker-Dealers; Order Placement .  Subject to the overall review of the Fund’s Board of Trustees, the Sub-Adviser is responsible for decisions to buy and sell securities and other portfolio holdings of the Fund, for selecting the broker or dealer to be used, and for negotiating any commission rates paid.  In underwritten offerings, securities usually are purchased at a fixed price that includes an amount of compensation to the underwriter, generally referred to as the underwriter’s concession or discount.  On occasion, certain money market instruments may be purchased directly from an issuer, in which case no commissions or discounts are paid.

          The Sub-Adviser and its affiliates manage other accounts, including private funds and individual accounts that invest in senior loans and Fund investments.  Although investment decisions for the Fund are made independently from those of such other accounts, investments of the type the Fund may make also may be made on behalf of such other accounts.  When the Fund and one or more other accounts is prepared to invest in, or desires to dispose of, the same investment, available investments or opportunities for each are allocated in a manner believed by the Sub-Adviser to be equitable over time.  The Sub-Adviser may (but is not obligated to) aggregate orders, which may include orders for accounts in which the Sub-Adviser or its affiliates have an interest, to purchase and sell securities to obtain favorable execution or lower brokerage commissions, to the extent permitted by applicable laws and regulations.  Although the Sub-Adviser believes that, over time, the potential benefits of participating in volume transactions and negotiating lower transaction costs should benefit all participating accounts, in some cases these activities may adversely affect the price paid or received or the size of the position obtained by or disposed of for the Fund.  Where trades are aggregated, the investments or proceeds, as well as the expenses incurred, will be allocated by the Sub-Adviser in a manner designed to be equitable and consistent with the Sub-Adviser’s fiduciary duty to the Fund and its other clients (including its duty to seek to obtain best execution of client trades).

           Commission Rates; Brokerage and Research Services .  In placing orders for the Fund’s portfolio, the Sub-Adviser is required to give primary consideration to obtaining the most favorable price and efficient execution.  This means that the Sub-Adviser will seek to execute each transaction at a price and commission, if any, that provides the most favorable total cost or proceeds reasonably attainable in the circumstances.  In seeking the most favorable price and execution, the Sub-Adviser, having in mind the Fund’s best interests, will consider all factors it deems relevant, including, by way of illustration:  price; the size, type and difficulty of the transaction; the nature of the market for the security; the amount of the commission; the timing of the transaction taking into account market prices and trends; operational capabilities; the reputation, experience and financial stability of the broker-dealer involved; and the quality of service rendered by the broker-dealer in other transactions.  Though the Sub-Adviser generally seeks reasonably competitive commissions or spreads, the Fund will not necessarily be paying the lowest commission or spread available.

          Within the framework of the policy of obtaining the most favorable price and efficient execution, the Sub-Adviser does not currently consider “brokerage and research services” (as defined in the Securities Exchange Act) provided by brokers who effect portfolio transactions with the Sub-Adviser or the Fund, but in the future may choose to do so subject to the review of the Fund’s Board of Trustees and amendment to this SAI.  “Brokerage and research services” are services that brokerage houses customarily provide to institutional investors and include statistical and economic data and research reports on particular issuers and industries. 

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DESCRIPTION OF THE FUND’S SHARES

          The Fund is a series of Highland Funds I (the “Trust”), a Delaware statutory trust formed on February 28, 2006 .  The Trust is authorized to issue an unlimited number of its shares of beneficial interest in separate series and classes of each series.   The Trust may, but is not required to hold regular annual shareholder meetings, but may hold special meetings for consideration of proposals requiring shareholder approval, such as changing fundamental policies or upon the written request of 10% of the Fund’s shares to replace its Trustees.  The Trust’s Board of Trustees is authorized to classify or reclassify the unissued shares of the Trust into one or more separate series of shares representing a separate, additional investment portfolio or one or more separate classes of new or existing series.  The Fund currently offers Class A, Class C and Class Z shares.  Shares of all series will have identical voting rights, except where by law, certain matters must be approved by the requisite proportion of the shares of the affected series.  Each share of any class when issued has equal dividend, liquidation (see “Redemption of Shares”) and voting rights within the class for which it was issued and each fractional share has those rights in proportion to the percentage that the fractional share represents of a whole share.  Shares will be voted in the aggregate except where otherwise required by law and except that each class of each series will vote separately on certain matters pertaining to its distribution and shareholder servicing arrangements. 

          There are no conversion or preemptive rights in connection with any shares of the Fund.  All shares, when issued in accordance with the terms of the offering, will be fully paid and nonassessable.  At the option of the shareholder, shares will be redeemed at NAV, subject, however, in limited circumstances to a redemption fee or a CDSC, all as described in the Prospectus.

          The shares of the Fund have noncumulative voting rights, which means that the holders of more than 50% of the shares can elect 100% of the trustees if the holders choose to do so, and, in that event, the holders of the remaining shares will not be able to elect any person or persons to the Board of Trustees.  Unless specifically requested by an investor who is a shareholder of record, the Fund does not issue certificates evidencing Fund shares.

Description of the Trust

          Under Delaware law, shareholders of a statutory trust shall have the same limitation of personal liability that is extended to stockholders of private corporations for profit organized under Delaware law, unless otherwise provided in the trust’s governing trust instrument.  The Highland Funds I Agreement and Declaration of Trust (the “Declaration of Trust”) provides that shareholders shall not be personally liable to any person in connection with any and all property, real or personal, tangible or intangible, that at such time is owned or held by or for the account of a particular series  Moreover, the Declaration of Trust expressly provides that the shareholders shall have the same limitation of personal liability that is extended to shareholders of a private corporation for profit incorporated in the State of Delaware.

          The Declaration of Trust provides no Trustee, officer, employee or agent of the Trust or any series of the Trust shall be subject in such capacity to any personal liability whatsoever to any person, unless, as to liability to Highland Funds I or its shareholders, the Trustees engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of their offices. 

          Highland Funds I shall continue without limitation of time subject to the provisions in the Declaration of Trust concerning termination by action of the Trustees, and without any vote of the Trust’s shareholders, except as may be required under the 1940 Act.

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Trust Matters

          The Trust reserves the right to create and issue a number of series shares, in which case the shares of each series would participate equally in the earnings, dividends, and assets of the particular series and would vote separately to approve investment advisory agreements or changes in fundamental investment policies, but shares of all series would vote together in the election or selection of Trustees and on any other matters as may be required by applicable law.

          Upon liquidation of the Trust or any series, shareholders of the affected series would be entitled to share pro rata in the net assets of their respective series available for distribution to such shareholders.

Shareholder Approval

          Other than elections of Trustees, which is by plurality, any matter for which shareholder approval is required by the 1940 Act requires the affirmative “vote of a majority of the outstanding voting securities” (as defined in the 1940 Act) of the Fund or the Trust at a meeting called for the purpose of considering such approval.

Information for Shareholders

          All shareholder inquiries regarding administrative procedures, including the purchase and redemption of shares, should be directed to the Distributor, PFPC Distributors, Inc., 760 Moore Road, King of Prussia, Pennsylvania 19406.  For assistance, call 877-665-1287 or through the internet at www.highlandfunds.com.

PROGRAMS FOR REDUCING OR ELIMINATING SALES CHARGES

          The following information supplements the discussion of methods for reducing or eliminating sales charges in the Prospectus.

           Letter of Intent (Class A shares only).   Any person may qualify for reduced sales charges on purchases of Class A shares made within a 13-month period pursuant to a Letter of Intent (“Statement”).  A shareholder may include, as an accumulation credit toward the completion of such Statement, the value of all shares (of any class) of the Highland Funds held by the shareholder on the date of the Statement.]  The value is determined at the public offering price on the date of the Statement.  Purchases made through reinvestment of distributions do not count toward satisfaction of the Statement.  Upon request, a Statement may be backdated to reflect purchases within 90 days.

          During the term of a Statement, the Transfer Agent will hold shares in escrow to secure payment of the higher sales charge applicable to Class A shares actually purchased.  Dividends and capital gains will be paid on all escrowed shares and those shares will be released when the amount indicated has been purchased.  A Statement does not obligate the investor to buy or the Fund to sell the amount specified in the Statement.

          If a shareholder exceeds the amount specified in the Statement and reaches an amount that would qualify for a further quantity discount, a retroactive price adjustment will be made at the time of expiration of the Statement.  The resulting difference in offering price will purchase additional shares for the shareholder’s account at the applicable offering price.  As a part of this adjustment, the financial advisor shall return to the Distributor the excess commission previously paid during the 13-month period.

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          If the amount specified in the Statement is not purchased, the shareholder shall remit to the Distributor an amount equal to the difference between the sales charge paid and the sales charge that should have been paid.  If the shareholder fails within 20 days after a written request to pay such a difference in sales charge, the Transfer Agent will redeem that number of escrowed Class A shares to equal such difference.  The additional amount of financial advisor discount from the applicable offering price shall be remitted to the shareholder’s financial advisor of record.

          Additional information about and the terms of Letters of Intent are available from your financial advisor, or from  the Transfer Agent at (877) 665-1287.

           Reinstatement Privilege .  A shareholder who has redeemed Class A or C shares of the Fund may, upon request, reinstate within one year a portion or all of the proceeds of such sale in shares of Class A of another Highland Fund at the NAV next determined after the Transfer Agent receives a reinstatement request and payment.  Shareholders who desire to exercise this privilege should contact their financial advisor or the Transfer Agent.  Shareholders may exercise this privilege an unlimited number of times.  Exercise of this privilege does not alter the federal income tax treatment of any capital gains realized on the prior sale of Fund shares, but to the extent any such shares were sold at a loss, some or all of the loss may be disallowed for tax purposes.  Consult your tax advisor.

           Privileges of Financial Services Firms .  Class A shares of the Fund may be sold at NAV, without a sales charge, to registered representatives and employees of financial services firms (including their affiliates) that are parties to dealer agreements or other sales arrangements with the Distributor; and such persons’ families and their beneficial accounts.

          Privileges of certain Shareholders .  Any shareholder eligible to buy Class Z shares of any Highland Fund may purchase Class A shares of another Highland Fund at NAV in those cases where a Class Z share is not available.  Qualifying shareholders will not be subject to a Class A initial sales charge or CSDC; however, they will be subject to the annual Rule 12b-1 distribution and service fee.

          Sponsored Arrangements .  Class A shares of the Fund may be purchased at reduced or no sales charge pursuant to sponsored arrangements, which include programs under which an organization makes recommendations to, or permits group solicitation of, its employees, members or participants in connection with the purchase of shares of the Fund on an individual basis.  The amount of the sales charge reduction will reflect the anticipated reduction in sales expense associated with sponsored arrangements.  The reduction in sales expense, and therefore the reduction in sales charge, will vary depending on factors such as the size and stability of the organization’s group, the term of the organization’s existence and certain characteristics of the members of its group.  The Fund reserves the right to revise the terms of or to suspend or discontinue sales pursuant to sponsored plans at any time.

          Class A shares may also be purchased at reduced or no sales charge by clients of dealers, brokers or registered investment advisers that have entered into agreements with the Distributor pursuant to which the Fund is included as an investment option in programs involving fee-based compensation arrangements, and by participants in certain retirement plans.

          Waiver of CDSCs.   CDSCs may be waived on redemptions in the following situations with the proper documentation:

 

1.

Death .  CDSCs may be waived on redemptions within one year following the death of (i) the sole shareholder on an individual account, (ii) a joint tenant where the surviving joint tenant is the deceased’s spouse, or (iii) the beneficiary of a Uniform Gifts to Minors Act (“UGMA”), Uniform Transfers to Minors Act (“UTMA”) or other custodial account.  If,

24


 

 

upon the occurrence of one of the foregoing, the account is transferred to an account registered in the name of the deceased’s estate, the CDSC will be waived on any redemption from the estate account occurring within one year after the death.  If the Class C shares are not redeemed within one year of the death, they will remain subject to the applicable CDSC, when redeemed from the transferee’s account.  If the account is transferred to a new registration and then a redemption is requested, the applicable CDSC will be charged.

 

 

 

 

2.

Disability .  CDSCs may be waived on redemptions occurring within one year after the sole shareholder on an individual account or a joint tenant on a spousal joint tenant account becomes disabled (as defined in Section 72(m)(7) of the Internal Revenue Code of 1986, as amended).  To be eligible for such waiver, (i) the disability must arise after the purchase of shares and (ii) the disabled shareholder must have been under age 65 at the time of the initial determination of disability, and (iii) a letter from a physician signed under penalty of perjury stating the nature of the disability.  If the account is transferred to a new registration and then a redemption is requested, the applicable CDSC will be charged.

 

 

 

 

3.

Death of a trustee .  CDSCs may be waived on redemptions occurring upon dissolution of a revocable living or grantor trust following the death of the sole trustee where (i) the grantor of the trust is the sole trustee and the sole life beneficiary, (ii) death occurs following the purchase and (iii) the trust document provides for dissolution of the trust upon the trustee’s death.  If the account is transferred to a new registration (including that of a successor trustee), the applicable CDSC will be charged upon any subsequent redemption.

 

 

 

 

4.

Returns of excess contributions .  CDSCs may be waived on redemptions required to return excess contributions made to retirement plans or individual retirement accounts, so long as the financial advisor agrees to return all or the agreed-upon portion of the commission received on the shares being redeemed.

 

 

 

 

5.

Qualified Retirement Plans .  CDSCs may be waived on redemptions required to make distributions from qualified retirement plans following normal retirement age (as stated in the Plan document).

          The CDSC also may be waived where the financial services firm agrees to return all or an agreed-upon portion of the commission received on the sale of the shares being redeemed.

INCOME TAX CONSIDERATIONS

          The following discussion summarizes certain U.S. federal income tax considerations affecting the Fund and the purchase, ownership and disposition of the Fund’s shares by U.S. persons.  This discussion is based upon current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), the regulations promulgated thereunder and judicial and administrative authorities, all of which are subject to change or differing interpretations by the courts or the Internal Revenue Service (the “IRS”), possibly with retroactive effect.  No attempt is made to present a detailed explanation of all U.S. federal tax concerns affecting the Fund and its shareholders (including shareholders owning large positions in the Fund).

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          The discussions set forth herein and in the Prospectus do not constitute tax advice, and potential investors are urged to consult their own tax advisors to determine the specific U.S. federal, state, local and foreign tax consequences to them of investing in the Fund.

Taxation of the Fund

          The Fund intends to elect to be treated and to qualify annually as a regulated investment company under Subchapter M of the Code.  Accordingly, the Fund must, among other things, meet the following requirements regarding the source of its income and the diversification of its assets:

          (i)          The Fund must derive in each taxable year at least 90% of its gross income from the following sources:  (a) dividends, interest (including tax-exempt interest), payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gain from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or foreign currencies; and (b) interests in “qualified publicly traded partnerships” (as defined in the Code).

          (ii)          The Fund must diversify its holdings so that, at the end of each quarter of each taxable year: (a) at least 50% of the market value of the Fund’s total assets is represented by cash and cash items, U.S. government securities, the securities of other regulated investment companies and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the value of the Fund’s total assets and not more than 10% of the outstanding voting securities of such issuer and (b) not more than 25% of the market value of the Fund’s total assets is invested in the securities (other than U.S. government securities and the securities of other regulated investment companies) of: (I) any one issuer, (II) any two or more issuers that the Fund controls and that are determined to be engaged in the same business or similar or related trades or businesses or (III) any one or more “qualified publicly traded partnerships” (as defined in the Code).

          As a regulated investment company, the Fund generally will not be subject to U.S. federal income tax on income and gains that the Fund distributes to its shareholders provided that it distributes each taxable year at least the sum of: (i) 90% of the Fund’s investment company taxable income (which includes, among other items, dividends, interest and the excess of any net short-term capital gain over net long-term capital loss and other taxable income, other than any net long-term capital gain, reduced by deductible expenses) determined without regard to the deduction for dividends paid and (ii) 90% of the Fund’s net tax-exempt interest (the excess of its gross tax-exempt interest over certain disallowed deductions).  The Fund intends to distribute substantially all of such income each year.  The Fund will be subject to income tax at regular corporation rates on any taxable income or gains that it does not distribute to its shareholders.

          The Code imposes a 4% nondeductible excise tax on the Fund to the extent the Fund does not distribute by the end of any calendar year at least the sum of: (i) 98% of its ordinary income (not taking into account any capital gain or loss) for the calendar year and (ii) 98% of its capital gain in excess of its capital loss (adjusted for certain ordinary losses) for a one-year period generally ending on October 31 of the calendar year (unless an election is made to use the Fund’s fiscal year).  In addition, the minimum amounts that must be distributed in any year to avoid the excise tax will be increased or decreased to reflect any under-distribution or over-distribution, as the case may be, from the previous year.  While the Fund intends to distribute any income and capital gain in the manner necessary to minimize imposition of the 4% excise tax, there can be no assurance that sufficient amounts of the Fund’s taxable income and capital gain will be distributed to avoid entirely the imposition of the excise tax.  In that event, the Fund will be liable for the excise tax only on the amount by which it does not meet the foregoing distribution requirement.

26


          If for any taxable year the Fund does not qualify as a regulated investment company, all of its taxable income (including its net capital gain) will be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and such distributions will be taxable to the shareholders as ordinary dividends to the extent of the Fund’s current or accumulated earnings and profits.  Such dividends, however, would be eligible (i) to be treated as qualified dividend income in the case of shareholders taxed as individuals and (ii) for the dividends-received deduction in the case of shareholders taxed as corporations.  The Fund could be required to recognize unrealized gains, pay taxes and make distributions (which could be subject to interest charges) before requalifying for taxation as a regulated investment company.  If the Fund fails to qualify as a regulated investment company in any year, it must pay out its earnings and profits accumulated in that year in order to qualify again as a regulated investment company.  If the Fund fails to qualify as a regulated investment company for a period greater than two taxable years, the Fund may be required to recognize and pay tax on any net built-in gains with respect to certain of its assets (i.e., the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if the Fund had been liquidated) or, alternatively, to elect to be subject to taxation on such built-in gain recognized for a period of ten years, in order to qualify as a regulated investment company in a subsequent year.

          Certain of the Fund’s investment practices are subject to special and complex U.S. federal income tax provisions that may, among other things: (i) treat dividends that would otherwise constitute qualified dividend income as non-qualified dividend income, (ii) treat dividends that would otherwise be eligible for the corporate dividends-received deduction as ineligible for such treatment, (iii) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (iv) convert lower taxed long-term capital gain into higher taxed short-term capital gain or ordinary income, (v) convert an ordinary loss or deduction into a capital loss (the deductibility of which is more limited) or (vi) cause the Fund to recognize income or gain without a corresponding receipt of cash.

          If the Fund purchases shares in certain foreign investment entities, called passive foreign investment companies (“PFICs”), the Fund may be subject to U.S. federal income tax on a portion of any “excess distribution” or gain from the disposition of such shares even if such income is distributed as a taxable dividend by the Fund to the shareholders.  Additional charges in the nature of interest may be imposed on the Fund in respect of deferred taxes arising from such distributions or gains.  Elections may be available to the Fund to mitigate the effect of this tax, but such elections generally accelerate the recognition of income without the receipt of cash.  Dividends paid by PFICs will not be qualified dividend income, as discussed below under “Taxation of Shareholders.”

          If the Fund invests in the shares of a PFIC, or any other investment that produces income that is not matched by a corresponding cash distribution to the Fund, the Fund could be required to recognize income that it has not yet received.  Any such income would be treated as income earned by the Fund and therefore would be subject to the distribution requirements of the Code.  This might prevent the Fund from distributing 90% of its net investment income as is required in order to avoid Fund-level U.S. federal income taxation on all of its income, or might prevent the Fund from distributing enough ordinary income and capital gain net income to avoid completely the imposition of the excise tax.  To avoid this result, the Fund may be required to borrow money or dispose of securities to be able to make required distributions to the shareholders.

          Dividend, interest and other income received by the Fund from investments outside the United States may be subject to withholding and other taxes imposed by foreign countries.  Tax treaties between the United States and other countries may reduce or eliminate such taxes.  The Fund does not expect that it will be eligible to elect to treat any foreign taxes it pays as paid by its shareholders, who therefore will not be entitled to credits for such taxes on their own tax returns.  Foreign taxes paid by a Fund will reduce the return from the Fund’s investments.

27


Taxation of Shareholders

          The Fund will determine either to distribute or to retain for reinvestment all or part of its net capital gain.  If any such gain is retained, the Fund will be subject to a corporate income tax (currently at a maximum rate of 35%) on such retained amount.  In that event, the Fund expects to designate the retained amount as undistributed capital gain in a notice to its shareholders, each of whom: (i) will be required to include in income for U.S. federal tax purposes as long-term capital gain its share of such undistributed amounts, (ii) will be entitled to credit its proportionate share of the tax paid by the Fund against its U.S. federal income tax liability and to claim refunds to the extent that the credit exceeds such liability and (iii) will increase its basis in its shares of the Fund by an amount equal to 65% of the amount of undistributed capital gain included in such shareholder’s gross income.

          Distributions paid to you by the Fund from its net realized long-term capital gains, if any, that the Fund designates as capital gains dividends (“capital gain dividends”) are taxable as long-term capital gains, regardless of how long you have held your shares.  All other dividends paid to you by the Fund (including dividends from short-term capital gains) from its current or accumulated earnings and profits (“ordinary income dividends”) are generally subject to tax as ordinary income.

          Special rules apply, however, to ordinary income dividends paid to individuals with respect to taxable years beginning on or before December 31, 2008.  If you are an individual, any such ordinary income dividend that you receive from the Fund generally will be eligible for taxation at the rates applicable to long-term capital gains (currently at a maximum rate of 15%) to the extent that: (i) the ordinary income dividend is attributable to “qualified dividend income” (i.e., generally dividends paid by U.S. corporations and certain foreign corporations) received by the Fund, (ii) the Fund satisfies certain holding period and other requirements with respect to the stock on which such qualified dividend income was paid and (iii) you satisfy certain holding period and other requirements with respect to your shares.  Ordinary income dividends subject to these special rules are not actually treated as capital gains, however, and thus will not be included in the computation of your net capital gain and generally cannot be used to offset any capital losses.  Congress is currently considering certain proposals to extend the preferential tax rates for qualified dividend income beyond 2008, but no assurances can be given in this regard.

          Any distributions you receive that are in excess of the Fund’s current or accumulated earnings and profits will be treated as a tax-free return of capital to the extent of your adjusted tax basis in your shares, and thereafter as capital gain from the sale of shares.  The amount of any Fund distribution that is treated as a tax-free return of capital will reduce your adjusted tax basis in your shares, thereby increasing your potential gain or reducing your potential loss on any subsequent sale or other disposition of your shares.

          Dividends and other taxable distributions are taxable to you even if they are reinvested in additional shares of the Fund.  Dividends and other distributions paid by the Fund are generally treated under the Code as received by you at the time the dividend or distribution is made.  If, however, the Fund pays you a dividend in January that was declared in the previous October, November or December and you were the shareholder of record on a specified date in one of such months, then such dividend will be treated for tax purposes as being paid by the Fund and received by you on December 31 of the year in which the dividend was declared.

          The price of shares purchased at any time may reflect the amount of a forthcoming distribution.  If you purchase shares just prior to a distribution, you will receive a distribution that will be taxable to you even though it represents in part a return of your invested capital.

28


          The Fund will send you information after the end of each year setting forth the amount and tax status of any distributions paid to you by the Fund.  Ordinary income dividends and capital gain dividends may also be subject to state and local taxes.

          If you sell or otherwise dispose of shares of the Fund (including exchange them for shares of another fund), you will generally recognize a gain or loss in an amount equal to the difference between your tax basis in such shares of the Fund and the amount you receive upon disposition of such shares.  If you hold your shares as capital assets, any such gain or loss will be long-term capital gain or loss if you have held such shares for more than one year at the time of sale.  Any loss upon the sale or exchange of shares held for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends received (including amounts credited as an undistributed capital gain dividend) by you with respect to such shares.  Any loss you realize on a sale or exchange of shares will be disallowed if you acquire other shares (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after your sale or exchange of the shares.  In such case, your tax basis in the shares acquired will be adjusted to reflect the disallowed loss.

          Current law taxes both long-term and short-term capital gain of corporations at the rates applicable to ordinary income.  For non-corporate taxpayers, short-term capital gain is currently taxed at rates applicable to ordinary income (currently at a maximum of 35%) while long-term capital gain generally is taxed at a maximum rate of 15%.

          Shareholders may be entitled to offset their capital gain dividends with capital loss.  The Code contains a number of statutory provisions affecting when capital loss may be offset against capital gain and limiting the use of loss from certain investments and activities.  Accordingly, shareholders that have capital losses are urged to consult their tax advisors.

          The Fund may be required to withhold, for U.S. federal backup withholding tax purposes, a portion of the dividends, distributions and redemption proceeds payable to a shareholder who fails to provide the Fund (or its agent) with the shareholder’s correct taxpayer identification number (in the case of an individual, generally, such individual’s social security number) or to make the required certification, or who has been notified by the IRS that such shareholder is subject to backup withholding.  Certain shareholders are exempt from backup withholding.  Backup withholding is not an additional tax and any amount withheld may be refunded or credited against your U.S. federal income tax liability, if any, provided that you furnish the required information to the IRS.

29


APPENDIX  —  RATINGS CATEGORIES

Ratings in General .  A rating of a rating service represents the service’s opinion as to the credit quality of the security being rated.  However, the ratings are general and are not absolute standards of quality or guarantees as to the creditworthiness of an issuer.  Consequently, the Adviser believes that the quality of debt securities should be continuously reviewed and that individual analysts give different weightings to the various factors involved in credit analysis.  A rating is not a recommendation to purchase, sell or hold a security because it does not take into account market value or suitability for a particular investor.  When a security has received a rating from more than one service, each rating should be evaluated independently.  Ratings are based on current information furnished by the issuer or obtained by the rating services from other sources that they consider reliable.  Ratings may be changed, suspended or withdrawn as a result of changes in or unavailability of such information, or for other reasons.  The following is a description of the characteristics of ratings used by Moody’s and S&P.

Corporate Bond Ratings

Moody’s

Long-term

Aaa
Bonds rated ‘Aaa’ are judged to be of the best quality.  They carry the smallest degree of investment risk and are generally referred to as “gilt edged.”  Interest payments are protected by a large or by an exceptionally stable margin and principal is secure.  While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.

Aa
Bonds rated ‘Aa’ are judged to be of high quality by all standards.  Together with the ‘Aaa’ group they comprise what are generally known as high-grade bonds.  They are rated lower than the best bonds because margins of protection may not be as large as in ‘Aaa’ securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the ‘Aaa’ securities.

A
Bonds rated ‘A’ possess many favorable investment attributes and are to be considered as upper-medium-grade obligations.  Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future.

Baa
Bonds rated ‘Baa’ are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured).  Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time.  Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.

Ba
Bonds rated ‘Ba’ are judged to have speculative elements; their future cannot be considered as well-assured.  Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future.  Uncertainty of position characterizes bonds in this class.

30


B
Bonds rated ‘B’ generally lack characteristics of the desirable investment.  Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.

Caa
Bonds rated ‘Caa’ are of poor standing.  Such issues may be in default or there may be present elements of danger with respect to principal or interest.

Ca
Bonds rated ‘Ca’ represent obligations which are speculative in a high degree.  Such issues are often in default or have other marked shortcomings.

C
Bonds rated ‘C’ are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.

Note:  Moody’s applies numerical modifiers 1, 2, and 3 in each generic rating classification from ‘Aa’ through ‘Caa.’  The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.

Prime rating system (short-term)

Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations.  Prime-1 repayment ability will often be evidenced by many of the following characteristics:

 

•

Leading market positions in well-established industries.

 

 

 

 

•

High rates of return on funds employed.

 

 

 

 

•

Conservative capitalization structure with moderate reliance on debt and ample asset protection.

 

 

 

 

•

Broad margins in earnings coverage of fixed financial charges and high internal cash generation.

 

 

 

 

•

Well-established access to a range of financial markets and assured sources of alternate liquidity.

Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations.  This will normally be evidenced by many of the characteristics cited above but to a lesser degree.  Earnings trends and coverage ratios, while sound, may be more subject to variation.  Capitalization characteristics, while still appropriate, may be more affected by external conditions.  Ample alternate liquidity is maintained.

Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations.  The effect of industry characteristics and market compositions may be more pronounced.  Variability in earnings and profitability may result in changes in the level of debt protection

31


measurements and may require relatively high financial leverage.  Adequate alternate liquidity is maintained.

Issuers rated Not Prime do not fall within any of the Prime rating categories.

S&P

Long-term

AAA
An obligation rated ‘AAA’ has the highest rating assigned by S&P.  The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.

AA
An obligation rated ‘AA’ differs from the highest rated obligations only in small degree.  The obligor’s capacity to meet its financial commitment on the obligation is very strong.

A
An obligation rated ‘A’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories.  However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.

BBB
An obligation rated ‘BBB’ exhibits adequate protection parameters.  However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

BB, B, CCC, CC, and C
Obligations rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ are regarded as having significant speculative characteristics.  ‘BB’ indicates the least degree of speculation and ‘C’ the highest.  While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.

BB
An obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative issues.  However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

B
An obligation rated ‘B’ is more vulnerable to nonpayment than obligations rated ‘BB’, but the obligor currently has the capacity to meet its financial commitment on the obligation.  Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.

CCC
An obligation rated ‘CCC’ is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.  In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.

32


CC
An obligation rated ‘CC’ is currently highly vulnerable to nonpayment.

C
A subordinated debt or preferred stock obligation rated ‘C’ is currently highly vulnerable to nonpayment.  The ‘C’ rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued.  A ‘C’ also will be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying.

D
An obligation rated ‘D’ is in payment default.  The ‘D’ rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period.  The ‘D’ rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.

r
The symbol ‘r’ is attached to the ratings of instruments with significant noncredit risks.  It highlights risks to principal or volatility of expected returns which are not addressed in the credit rating.  Examples include:  obligations linked or indexed to equities, currencies, or commodities; obligations exposed to severe prepayment risk—such as interest-only or principal-only mortgage securities; and obligations with unusually risky interest terms, such as inverse floaters.

N.R.
The designation ‘N.R.’ indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that S&P does not rate a particular obligation as a matter of policy.
Note:  The ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign designation to show relative standing within the major rating categories.

Short-term

A-1
A short-term obligation rated ‘A-1’ is rated in the highest category by S&P.  The obligor’s capacity to meet its financial commitment on the obligation is strong.  Within this category, certain obligations are given a plus sign (+) designation.  This indicates that the obligor’s capacity to meet its financial commitment on these obligations is extremely strong.

A-2
A short-term obligation rated ‘A-2’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories.  However, the obligor’s capacity to meet its financial commitment on the obligation is satisfactory.

A-3
A short-term obligation rated ‘A-3’ exhibits adequate protection parameters.  However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

B
A short-term obligation rated ‘B’ is regarded as having significant speculative characteristics.  The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces

33


major ongoing uncertainties which could lead to the obligor’s inadequate capacity to meet is financial commitment on the obligation.

C
A short-term obligation rated ‘C’ is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.

D
A short-term obligation rated ‘D’ is in payment default.  The ‘D’ rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period.  The ‘D’ rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.

34



PART C:  Other Information

Item 23.

Exhibits

 

 

 

 

All references to the “Registration Statement” refer to the Registration Statement on Form N-1A (File No.                         ) of Highland Funds I (the “Registrant”).

 

 

 

 

(a)

Agreement and Declaration of Trust of the Registrant, dated February 27, 2006, filed herewith

 

 

 

 

(b)

By-laws of the Registrant, filed herewith

 

 

 

 

(c)

Instruments Defining Rights of Security Holders

 

Not applicable

 

 

 

 

(d)

Investment Advisory Contracts

 

(d)(1)

Form of Investment Advisory Agreement between Highland Capital Management, L.P. and the Registrant, filed herewith

 

 

 

 

 

(d)(2)

Form of Investment Sub-Advisory Agreement by and among the Registrant on behalf of the Fund, Highland Capital Management, L.P. and Prospect Management Advisers, L.P., filed herewith


 


(d)(3)


Form of Fee Waiver Agreement between Highland Capital Management, L.P. and Prospect Management Advisers, L.P., filed herewith

 

 

 

 

(e)

Underwriting Contracts

 

(e)(1)

Form of Underwriting Agreement by and between PFPC Distributors, Inc. and the Registrant, filed herewith

 

 

 

 

 

(e)(2)

Form of Selling Group Agreement, to be filed by pre-effective amendment

 

 

 

 

(f)

Bonus or Profit Sharing Contracts

 

Not applicable

 

 

 

 

(g)

Custodian Agreements

 

(g)(1)

Form of Custodian Services Agreement between PFPC Trust Company and the Registrant, filed herewith

 

 

 

 

(h)

Other Material Contracts

1


 

(h)(1)

Form of Accounting Services Agreement between the Registrant and PFPC Inc., filed herewith

 

 

 

 

(h)(2)

Form of Administration Services Agreement between Highland Capital Management, L.P. and the Registrant, filed herewith

 

 

 

 

(h)(3)

Form of Sub-Administration Services Agreement between Highland Capital Management, L.P. and PFPC Inc., filed herewith

 

 

 

 

(h)(4)

Form of Transfer Agency Services Agreement by and between PFPC Inc. and the Registrant, filed herewith

 

 

 

 

(i)

Legal Opinion

 

(i)(1)

Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, to be filed by pre-effective amendment

 

 

 

 

(j)

Other Opinions

 

(j)(1)

Consent and Report of independent auditors, to be filed by pre-effective amendment

 

 

 

 

 

(j)(2)

Powers of Attorney, filed herewith

 

 

(k)

Omitted Financial Statements

 

Not applicable

 

 

 

 

(l)

Initial Capital Agreements

 

To be filed by pre-effective amendment

 

 

 

 

(m)

Rule 12b-1 Plan

 

(m)(1)

Form of Rule 12b-1 Distribution Plan relating to Class A Shares & Class C Shares, filed herewith

 

 

 

 

(n)

Rule 18f-3 Plan

 

(n)(1)

Form of Rule 18f-3 Multi-Class Plan, filed herewith

 

 

 

 

(o)

Reserved

 

 

 

Not applicable

2


(p)

Codes of Ethics

 

(p)(1)

Form of Code of Ethics of the Registrant under Rule 17j-1 of the Investment Company Act of 1940 (the “1940 Act”), filed herewith

 

 

 

 

 

(p)(2)

Code of Ethics of Highland Capital Management, L.P., adviser to the Registrant, to be filed by pre-effective amendment

 

 

 

 

 

(p)(3)

Code of Ethics of Prospect Management Advisers, L.P., sub-adviser to the Registrant, filed herewith

 

 

 

 

 

(p)(4)

Code of Ethics of PFPC Distributors, Inc., principal underwriter to the Registrant, filed herewith

 

 

 

 

Item 24.

Persons Controlled by or Under Common Control with the Fund

 

 

Not applicable

 

 

 

 

Item 25.

Indemnification

 

 

 

 

 

 

Section 4.2 of the Registrant’s Agreement and Declaration of Trust provides for the indemnification of the Registrant’s trustees and officers.  Indemnification of the Registrant’s adviser, sub-adviser, administrator, principal underwriter, custodian, accounting services agent, sub-administrator and transfer agent is provided for, subject also to the limitations, if applicable, of the 1940 Act, respectively, in the Registrant’s following forms of agreements:

 

 

 

 

 

 

1.

Section 6 of the Investment Advisory Agreement with Highland Capital Management, L.P.

 

 

 

 

 

 

2.

Section 11 of the Investment Sub-Advisory Agreement by and among the Registrant on behalf of the Fund, Highland Capital Management, L.P. and Prospect Management Advisers, L.P.

 

 

 

 

 

 

3.

Section 12 of the Administration Agreement with Highland Capital Management, L.P.

 

 

 

 

 

 

4.

Section 9 of the Underwriting Agreement with PFPC Distributors, Inc.

 

 

 

 

 

 

5.

Section 12 of the Custodian Services Agreement with PFPC Trust Company

 

 

 

 

 

 

6.

Section 12 of the Accounting Services Agreement with PFPC Inc.

 

 

 

 

 

 

7.

Section 12 of the Sub-Administration Agreement between Highland Capital Management L.P. and PFPC Inc.

3


 

 

8.

Section 12 of the Transfer Agency Services Agreement with PFPC Inc.

 

 

 

 

Item 26.

Business and Other Connections of the Investment Adviser

 

 

 

The description of the business of the investment adviser, Highland Capital Management, L.P., is set forth under the caption “Management of the Fund” in the Prospectuses and under the caption “Management” in the SAI, each forming part of this Registration Statement.  The information as to other businesses, if any, and the directors and officers of Highland Capital Management, L.P. is set forth in its Form ADV, as filed with the SEC on November 19, 2004 (File No. 801-54874) and as amended through the date hereof, and is incorporated herein by reference.

 

 

 

The description of the business of the investment sub-adviser, Prospect Management Advisers, L.P., is set forth under the caption “Management of the Fund” in the Prospectuses and under the caption “Management” in the SAI, each forming part of this Registration Statement. The information as to other businesses, if any, and the directors and officers of Prospect Management Advisers, L.P. is set forth in its Form ADV, as filed with the SEC on September 23, 2005 (File No. 801-63902) and as amended through the date hereof, and is incorporated herein by reference.

 

 

 

 

Item 27.

Principal Underwriter

 

 

 

 

 

(a)

PFPC Distributors, Inc., principal underwriter for the Registrant, is registered with the Securities and Exchange Commission as a broker-dealer and is a member of the National Association of Securities Dealers. PFPC Distributors, Inc. does not presently act as investment adviser for any registered investment companies, but does act as principal underwriter for the following investment companies:

 

 

 

 

 

 

 

GuideStone Funds

 

 

 

AFBA 5 Star Funds, Inc.

 

 

 

Atlantic Whitehall Funds Trust

 

 

 

CRM Mutual Fund Trust

 

 

 

Highland Floating Rate Fund

 

 

 

Highland Floating Rate Advantage Fund

 

 

 

Harris Insight Funds Trust

 

 

 

Kalmar Pooled Investment Trust

 

 

 

Matthews Asian Funds

 

 

 

Metropolitan West Funds

 

 

 

The RBB Fund, Inc.

 

 

 

RS Investment Trust

 

 

 

Stratton Growth Fund, Inc.

 

 

 

Stratton Monthly Dividend REIT Shares, Inc.

4


 

 

 

The Stratton Funds, Inc.

 

 

 

Van Wagoner Funds

 

 

 

Wilshire Mutual Funds, Inc.

 

 

 

Wilshire Variable Insurance Trust

 

 

 

 

 

 

BlackRock Distributors, Inc., a wholly owned subsidiary of PFPC Distributors, Inc., acts as principal underwriter for the following investment companies:

 

 

 

 

 

 

 

BlackRock Provident Institutional Funds

 

 

 

BlackRock Funds

 

 

 

International Dollar Reserve Fund I, Ltd.

 

 

 

BlackRock Bond Allocation Target Shares

 

 

 

 

 

 

MGI Funds Distributors, Inc., a wholly owned subsidiary of PFPC Distributors, Inc. acts as principal underwriter for the following investment company:

 

 

 

 

 

 

 

MGI Funds

 

 

 

 

 

 

Northern Funds Distributors, LLC., a wholly owned subsidiary of PFPC Distributors, Inc. acts as principal underwriter for the following investment companies:

 

 

 

 

 

 

 

Northern Funds

 

 

 

Northern Institutional Funds

 

 

 

 

 

 

ABN AMRO Distribution Services (USA), Inc., a wholly owned subsidiary of PFPC Distributors, Inc., acts as principal underwriter for the following investment company:

 

 

 

 

 

 

 

ABN AMRO Funds

5


(b)

The table below lists each director, officer or partner of PFPC Distributors, Inc.


(1)

 

(2)

 

(3)

Name and Principal Business Address*

 

Positions and Offices with Underwriter

 

Positions and Offices with Registrant

 

 

Brian Burns

 

Chairman, Chief Executive Officer, Director and President

 

None

 

 

 

 

 

Michael Denofrio

 

Director

 

None

 

 

 

 

 

Nicholas Marsini

 

Director

 

None

 

 

 

 

 

Rita G. Adler

 

Chief Compliance Officer & Anti-Money Laundering Officer

 

None

 

 

 

 

 

Christine P. Ritch

 

Chief Legal Officer, Assistant Secretary and Assistant Clerk

 

None

 

 

 

 

 

John Munera

 

Anti-Money Laundering Officer

 

None

 

 

 

 

 

Julie Bartos

 

Assistant Secretary and Assistant Clerk

 

None

 

 

 

 

 

Bradley A. Stearns

 

Secretary and Clerk

 

None

 

 

 

 

 

Amy Brennan

 

Assistant Secretary and Assistant Clerk

 

None

 

 

 

 

 

Craig Stokarski

 

Treasurer and Financial & Operations Principal, Chief Financial Officer

 

None

 

 

 

 

 

Maria Schaffer

 

Controller and Assistant Treasurer

 

None

 

 

 

 

 

Bruno Di Stefano

 

Vice President

 

None

 

 

 

 

 

Susan K. Moscaritolo

 

Vice President

 

None


*

The principal business address for each individual is PFPC Distributors, Inc., 301 Bellevue Parkway, Wilmington, DE 19809.

 

 

 

 

 

(c)

Not applicable

 

 

 

 

Item 28.

Location of Accounts and Records

 

 

 

 

(1)

Prospect Management Advisers, L.P., 13455 Noel Road, Suite 1300, Dallas, TX, 75240  (records relating to its function as investment sub-adviser).

 

 

 

 

(2)

PFPC, Inc., 101 Sabin Street, Pawtucket, RI, 02860 (records relating to its function as  transfer agent and accounting services agent).

 

 

 

 

(3)

PFPC Distributors, Inc., 760 Moore Road, King of Prussia, PA, 19406 (records  relating to its function as distributor).

6


(4)

PFPC Trust Company, 8800 Tinicum Boulevard, Philadelphia, PA, 19153 (records  relating to its function as custodian).

 

 

 

 

(5)

Highland Capital Management, L.P., 13455 Noel Road, Suite 800, Dallas, TX, 75240  (records relating to its function as adviser and as administrator)

 

 

 

 

(6)

PFPC Inc., 760 Moore Road, King of Prussia, PA, 19406 (records relating to its function  as sub-administrator).

 

 

 

 

Item 29.

Management Services

 

Not applicable

 

 

Item 30.

Undertakings

The Registrant undertakes to file an amendment to the Registration Statement with certified financial statements showing the initial capital received before accepting subscriptions from more than 25 persons.

7


SIGNATURES

                    Pursuant to the requirements of the Securities Act of 1933, as amended (“Securities Act”) and the Investment Company Act of 1940, as amended, the Fund Registration Statement to be signed on its behalf by the undersigned, duly authorized, in the City of Dallas and State of Texas on the 3 rd day of March 2006.

 

HIGHLAND FUNDS I

 

 

 

 

 

 

 

By

/s/ JAMES D. DONDERO

 

 

 

 

James D. Dondero

 

 

Chief Executive Officer and President

                    Pursuant to the requirements of the Securities Act, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.

 

 

Title

 

Date

 

 

 

 

 

 

 

 

/s/ R. JOSEPH DOUGHERTY

 

Trustee

 

March 6, 2006

 

 

 

 

R. Joseph Dougherty

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ TIMOTHY K. HUI

 

Trustee

 

March 6, 2006

 

 

 

 

Timothy K. Hui

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ SCOTT F. KAVANAUGH

 

Trustee

 

March 6, 2006

 

 

 

 

Scott F. Kavanaugh

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ JAMES F. LEARY

 

Trustee

 

March 6, 2006

 

 

 

 

James F. Leary

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ BRYAN A. WARD

 

Trustee

 

March 6, 2006

 

 

 

 

Bryan A. Ward

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ JAMES D. DONDERO

 

Chief Executive Officer

 

March 6, 2006

 

and President

 

 

James D. Dondero

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ M. JASON BLACKBURN

 

Chief Financial Officer

 

March 6, 2006

 

(Principal Accounting Officer)

 

 

M. Jason Blackburn

 

and Secretary

 

 

 



Exhibit Index

 

 

Exhibit No.

 

Description

 

 

 

23(a)

 

Agreement and Declaration of Trust of the Registrant, dated February 27, 2006

 

 

 

23(b)

 

By-laws of the Registrant

 

 

 

23(d)(1)

 

Form of Investment Advisory Agreement between Highland Capital Management, L.P. and the Registrant

 

 

 

23(d)(2)

 

Form of Investment Sub-Advisory Agreement by and among the Registrant on behalf of the Fund, Highland Capital Management, L.P. and Prospect Management Advisers, L.P.

 

 

 

23(d)(3)

 

Form of Fee Waiver Agreement between Highland Capital Management, L.P. and Prospect Management Advisers, L.P.

 

 

 

23(e)(1)

 

Form of Underwriting Agreement by and between PFPC Distributors, Inc. and the Registrant

 

 

 

23(g)(1)

 

Form of Custodian Services Agreement between PFPC Trust Company and the Registrant

 

 

 

23(h)(1)

 

Form of Accounting Services Agreement between the Registrant and PFPC Inc.

 

 

 

23(h)(2)

 

Form of Administration Services Agreement between Highland Capital Management, L.P. and the Registrant

 

 

 

23(h)(3)

 

Form of Sub-Administration Services Agreement between Highland Capital Management, L.P. and PFPC Inc.

 

 

 

23(h)(4)

 

Form of Transfer Agency Services Agreement by and between PFPC Inc. and the Registrant

 

 

 

23(j)(2)

 

Powers of Attorney

 

 

 

23(m)(1)

 

Form of Rule 12b-1 Distribution Plan relating to Class A Shares & Class C Shares

 

 

 

23(n)(1)

 

Form of Rule 18f-3 Multi-Class Plan

 

 

 

23(p)(1)

 

Form of Code of Ethics of the Registrant under Rule 17j-1 ofthe Investment Company Act of 1940 (the "1940 Act")

 

 

 

23(p)(3)

 

Code of Ethics of Prospect Management Advisers, L.P., sub-adviser to the Registrant

 

 

 

23(p)(4)

 

Code of Ethics of PFPC Distributors, Inc., principal underwriter to the Registrant

 

 

 

 

 

HIGHLAND FUNDS I

 

AGREEMENT AND DECLARATION OF TRUST

 

February 27, 2006


TABLE OF CONTENTS

ARTICLE I
The Trust

 

Section 1.1

Name

2

Section 1.2

Definitions

2

Section 1.3

Purpose and Powers of Trust

4

 

 

ARTICLE II
Trustees

 

 

 

 

Section 2.1

Number and Qualification

4

Section 2.2

Term and Election

5

Section 2.3

Resignation and Removal

5

Section 2.4

Vacancies

5

Section 2.5

Meetings

6

Section 2.6

Officers

7

 

 

ARTICLE III
Powers and Duties of Trustees

 

 

 

 

Section 3.1

General

7

Section 3.2

Investments

8

Section 3.3

Legal Title

8

Section 3.4

Issuance and Repurchase of Shares

8

Section 3.5

Borrow Money or Utilize Leverage

9

Section 3.6

Delegation; Committees

9

Section 3.7

Collection and Payment

9

Section 3.8

Expenses

10

Section 3.9

By-Laws

10

Section 3.10

Miscellaneous Powers

10

Section 3.11

Further Powers

11

i


ARTICLE IV
Limitations of Liability and Indemnification

 

 

 

 

Section 4.1

No Personal Liability of Shareholders, Trustees, etc.

12

Section 4.2

Mandatory Indemnification

12

Section 4.3

No Duty of Investigation; Notice in Trust Instruments, etc.

14

Section 4.4

Reliance on Experts, etc.

14

 

 

ARTICLE V
Shares of Beneficial Interest

 

 

 

 

Section 5.1

Beneficial Interest

15

Section 5.2

Series Designation

15

Section 5.3

Class Designation

16

Section 5.4

Description of Shares

16

Section 5.5

Rights of Shareholders

18

Section 5.6

Trust Only

19

Section 5.7

Issuance of Shares

19

Section 5.8

Register of Shares

19

Section 5.9

Transfer of Shares

19

Section 5.10

Notices

20

Section 5.11

Net Asset Value

20

Section 5.12

Distributions to Shareholders

21

 

 

ARTICLE VI
Shareholders

 

 

 

 

Section 6.1

Meetings of Shareholders

21

Section 6.2

Voting

21

Section 6.3

Notice of Meeting, Shareholder Proposals and Record Date

22

Section 6.4

Quorum and Required Vote

22

Section 6.5

Proxies, etc.

23

Section 6.6

Reports

24

Section 6.7

Inspection of Records

24

Section 6.8

Shareholder Action by Written Consent

24

ii


ARTICLE VII
Redemption

 

 

 

 

Section 7.1

Redemptions

25

Section 7.2

Disclosure of Holding

25

Section 7.3

Redemptions of Small Accounts

25

 

 

 

ARTICLE VIII
Duration:  Termination of Trust; Amendment; Mergers, Etc.

 

 

 

 

Section 8.1

Duration

26

Section 8.2

Termination

26

Section 8.3

Amendment Procedure

27

Section 8.4

Merger, Consolidation and Sale of Assets

28

 

 

ARTICLE IX
Miscellaneous

 

 

 

 

Section 9.1

Filing

28

Section 9.2

Resident Agent

29

Section 9.3

Governing Law

29

Section 9.4

Counterparts

29

Section 9.5

Reliance by Third Parties

29

Section 9.6

Provisions in Conflict with Law or Regulation

30

iii


HIGHLAND FUNDS I

AGREEMENT AND DECLARATION OF TRUST

                    THIS AGREEMENT AND DECLARATION OF TRUST made as of this 27th day of February 2006, by the Trustees hereunder, and by the holders of shares of beneficial interest issued hereunder as hereinafter provided.

                    WHEREAS, this Trust has been formed to carry on business as set forth more particularly hereinafter;

                    WHEREAS, this Trust is authorized to issue an unlimited number of its shares of beneficial interest in separate series and classes of each such series, each separate series to be a sub-trust hereunder, all in accordance with the provisions hereinafter set forth;

                    WHEREAS, the Trustees have agreed to manage all property coming into their hands as Trustees of a Delaware statutory trust in accordance with the provisions hereinafter set forth; and

                    WHEREAS, the parties hereto intend that the Trust created by this Declaration and the Certificate of Trust filed with the Secretary of State of the State of Delaware on February 28, 2006 shall constitute a statutory trust under the Delaware Statutory Trust Statute and that this Declaration shall constitute the governing instrument of such statutory trust.

                    NOW, THEREFORE, the Trustees hereby declare that they will hold all cash, securities, and other assets which they may from time to time acquire in any manner as Trustees hereunder IN TRUST to manage and dispose of the same upon the following terms and conditions for the benefit of the holders from time to time of shares of beneficial interest in this Trust or sub-trusts created hereunder as hereinafter set forth.


ARTICLE  I

The Trust

                    Section 1.1      Name .  This Trust shall be known as “Highland Funds I” or any other name or names as the Trustees may from time to time determine.

                    Section 1.2      Definitions .  As used in this Declaration, the following terms shall have the following meanings:

                    “ By-Laws ” shall mean the By-Laws of the Trust as amended from time to time by the Trustees.

                    “ Class ” shall mean a portion of Shares of a Series of the Trust established in accordance with Section 5.3 hereof.

                    “ Code ” shall mean the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

                    “ Commission ” shall mean the Securities and Exchange Commission.

                    “ Declaration ” shall mean this Agreement and Declaration of Trust, as amended or amended and restated from time to time, including by way of any classifying or reclassifying Shares of any Series or any Class of any such Series or determining any designations, powers, preferences, voting, conversion and other rights, limitations, qualifications and terms and conditions thereof.

                    “ Delaware Statutory Trust Statute ” shall mean the provisions of the Delaware Statutory Trust Act, 12 Del. C. §3801, et. seq. , as such Act may be amended from time to time.

                    “ Fundamental Policies ” shall mean the investment policies and restrictions set forth from time to time in any Prospectus or contained in any current Registration Statement of the Trust or any Series filed with the Commission or as otherwise adopted by the Trustees and the Shareholders in accordance with the requirements of the 1940 Act that are expressly designated as fundamental policies of such Series as they may be amended from time to time in accordance with the 1940 Act.

2


                    “ Interested Person ” shall have the meaning ascribed thereto in the 1940 Act.

                    “ Majority Shareholder Vote ” shall mean a vote of a “majority of the outstanding voting securities” (as such term is defined in the 1940 Act) of the Trust, any Series of the Trust or any Class thereof, as applicable.

                    The “ 1940 Act ” refers to the Investment Company Act of 1940 and the rules and regulations promulgated thereunder and applicable exemptions there from, as amended from time to time.

                    The “1933 Act” refers to the Securities Act of 1933, and the rules and regulations promulgated thereunder and applicable exemptions there from, as amended from time to time.

                    “ Person ” shall mean and include natural persons, corporations, partnerships, trusts, limited liability companies, associations, joint ventures and other entities, whether or not legal entities, and governments and agencies and political subdivisions thereof.

                    “ Prospectus ” shall mean the current prospectus or offering memorandum of securities of the Trust or of any Series thereof or of any Class of any such Series, as applicable.

                    “ Series ” shall mean the separate sub-trusts that may be established and designated as series pursuant to Section 5.2 hereof or any one of such sub-trusts, as applicable.

                    “ Series Liabilities ” shall mean as of any particular time any and all debts, obligations or other liabilities, contingent or otherwise, of or relating to a particular Series of the Trust.

                    “ Series Property ” shall mean as of any particular time any and all property, real or personal, tangible or intangible, which at such time is owned or held by or for the account of a particular Series.

3


                    “ Shareholders ” shall mean as of any particular time the holders of record of outstanding Shares of the Trust, any Series of the Trust or any Class of any Series, as applicable, at such time.

                    “ Shares ” shall mean the transferable units of beneficial interest in the Trust or in a Series of the Trust and includes fractions of Shares as well as whole Shares, which Shares may be classified as relating to particular Series and Classes within a Series.  All references to Shares shall be deemed to be Shares of any or all Series or Classes as the context may require.

                    “ Trust ” shall mean the trust established by this Declaration, as amended from time to time, inclusive of each such amendment and every sub-trust established as a Series hereunder.

                    “ Trustees ” shall mean the signatory to this Declaration, so long as such signatory shall continue in office in accordance with the terms hereof, and all other Persons who at the time in question have been duly elected or appointed and have qualified as trustees in accordance with the provisions hereof and are then in office.

                    Section 1.3      Purpose and Powers of Trust .  The Trust is established for the purpose of engaging in any activity not prohibited by Delaware law and shall have the power to engage in any such activity and in any activity incidental or related to any such activity.

ARTICLE II

Trustees

                    Section 2.1      Number and Qualification .  Prior to any offering of Shares, there may be a sole Trustee and thereafter the number of Trustees shall be such number, not less than three or more than fifteen, as shall be set forth in a written instrument or resolution signed or adopted by a majority of the Trustees then in office.  No reduction in the number of Trustees shall have the effect of removing any Trustee from office prior to the expiration of his or her term.  An individual nominated as a Trustee shall be at least 21 years of age and not older than such age as may be set forth in a written instrument or resolution signed or adopted by not less than a majority of the Trustees then in office and

4


shall not be under legal disability.  Trustees need not own Shares and may succeed themselves in office.

                    Section 2.2      Term and Election .  Except for the Trustees appointed to fill vacancies pursuant to Section 2.4 hereof, each Trustee shall be elected to serve until death, resignation, removal or reelection at the annual meeting, if one is held, or at any special meeting of shareholders.  Subject to the foregoing sentence, each Trustee named herein or elected or appointed pursuant to the terms hereof shall hold office until such Trustee’s successor has been elected at such a meeting and has qualified to serve as Trustee.  Election of Trustees at a meeting shall be by the affirmative vote of the holders of a plurality of the Shares present in person or by proxy.  Each individual elected or appointed as a Trustee of the Trust shall, unless otherwise provided by such election or appointment, also thereby be elected or appointed, as the case may be, as a Trustee of each Series of the Trust in existence at any time such individual is a Trustee.  The Trustees may elect one of themselves to serve as Chairman.

                    Section 2.3      Resignation and Removal .  Any Trustee may resign his trust (without need for prior or subsequent accounting) by an instrument in writing signed by him and delivered or mailed to the Trustees or the Chairman, if any, the President or the Secretary and such resignation shall be effective upon such delivery, or at a later date according to the terms of the instrument.  Any Trustee may be removed (provided the aggregate number of Trustees after such removal shall not be less than the minimum number required by Section 2.1 hereof) for cause at any time by written instrument, signed by two-thirds of the remaining Trustees, specifying the date when such removal shall become effective.  Any Trustee may be removed (provided the aggregate number of Trustees after such removal shall not be less than the minimum number required by Section 2.1 hereof) without cause at any time by a written instrument, signed or adopted by two-thirds of the remaining Trustees or by vote of Shares having not less than two-thirds of the aggregate number of Shares entitled to vote in the election of such Trustee, specifying the date when such removal shall become effective.  Upon the resignation or removal of a Trustee, or such Person otherwise ceasing to be a Trustee, such Person shall cease to hold any Series Property previously held in the name of such former Trustee, without any requirement that such former Trustee execute and deliver any conveyance or acknowledgment thereof.

                    Section 2.4      Vacancies .  Whenever a vacancy in the Board of Trustees shall occur, the remaining Trustees may fill such vacancy by appointing an individual having

5


the qualifications described in this Article by a written instrument signed by a majority of the Trustees then in office or by election by the Shareholders, or may leave such vacancy unfilled or may reduce the number of Trustees (provided the aggregate number of Trustees after such reduction shall not be less than the minimum number required by Section 2.1 hereof).  Any vacancy created by an increase in Trustees may be filled by the appointment of an individual having the qualifications described in this Article made by a written instrument signed, or a resolution approved, by a majority of the Trustees then in office or by election by the Shareholders.  No vacancy shall operate to annul this Declaration or to revoke any existing authority or power existing pursuant to the terms of this Declaration.  Whenever a vacancy in the number of Trustees shall occur, until such vacancy is filled as provided herein, the Trustees in office, regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by this Declaration.

                    Section 2.5      Meetings .  Meetings of the Trustees shall be held from time to time upon the call of the Chairman, if any, the President, the Secretary or any two Trustees.  Regular meetings of the Trustees may be held without call or notice at a time and place fixed by the By-Laws or by resolution of the Trustees.  Notice of any other meeting shall be given by the Secretary and shall be delivered to the Trustees orally not less than 24 hours before the meeting or in writing not less than 72 hours, but may be waived in writing by any Trustee either before or after such meeting.  The attendance of a Trustee at a meeting shall constitute a waiver of notice of such meeting , except where a Trustee attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting has not been properly called or convened.  A quorum for all meetings of the Trustees shall be one-third, but not less than two, of the Trustees then in office.  Unless provided otherwise in this Declaration of Trust and except as required by the 1940 Act, any action of the Trustees may be taken at a meeting by vote of a majority of the Trustees present (a quorum being present) or without a meeting by written consent of a majority of the Trustees then in office.

                    Any committee of the Trustees, including an executive committee, if any, may act with or without a meeting.  A quorum for all meetings of any such committee shall be one-third, but not less than two, of the members thereof.  Unless provided otherwise in this Declaration or any instrument or resolution of the Trustees establishing or affecting such Committee, any action of any such committee may be taken at a meeting by vote of a majority of the members present (a quorum being present) or without a meeting by written consent of a majority of the members.

6


                    With respect to actions of the Trustees and any committee of the Trustees, Trustees who are Interested Persons in any action to be taken may be counted for quorum purposes under this Section and shall be entitled to vote to the extent not prohibited by the 1940 Act.

                    All or any one or more Trustees may participate in a meeting of the Trustees or any committee thereof by means of a conference telephone, internet connection or similar communications equipment by means of which all Persons participating in the meeting can hear or otherwise communicate with each other; participation in a meeting pursuant to any such communications system shall constitute presence in person at such meeting, except as otherwise provided by the 1940 Act.

                    Section 2.6      Officers .  The Trustees shall elect a President, a Secretary, a Treasurer and an Assistant Treasurer, who shall serve at the pleasure of the Trustees or until their successors are elected and qualified.  The Trustees may elect or appoint or may authorize the Chairman, if any, or President to appoint such other officers or agents with such other titles and powers as the Trustees may deem to be advisable.  The President, Secretary, Treasurer and Assistant Treasurer may, but need not, be a Trustee.

ARTICLE III

Powers and Duties of Trustees

                    Section 3.1      General .  The Trustees shall owe to the Trust and its Shareholders the same fiduciary duties as owed by directors of corporations to such corporations and their stockholders under the general corporation law of the State of Delaware.  The Trustees shall have exclusive and absolute control over the Series Property of each Series and over the business of the Trust and any Series thereof to the same extent as if the Trustees were the sole owners of all such Series Property and business in their own right, but with such powers of delegation as may be permitted by this Declaration.  The enumeration of any specific power herein shall not be construed as limiting the aforesaid power.  The Trustees may perform such acts as in their sole discretion are proper for conducting the business of the Trust.  The powers of the Trustees may be exercised without order of or resort to any court.  No Trustee shall be obligated to give any bond or other security for the performance of any of his duties or powers hereunder.

7


                    Section 3.2      Investments .  The Trustees shall have power, subject to the Fundamental Policies in effect from time to time, to:

                         (a)     manage, conduct, operate and carry on the business of an investment company;

                         (b)     subscribe for, invest in, reinvest in, purchase or otherwise acquire, hold, pledge, sell, assign, transfer, exchange, distribute or otherwise deal in or dispose of any and all sorts of property, tangible or intangible, including but not limited to securities of any type whatsoever, whether equity or non-equity, of any issuer, evidences of indebtedness of any Person and any other rights, interests, instruments or property of any sort and to exercise any and all rights, powers and privileges of ownership or interest in respect of any and all such investments of every kind and description, including, without limitation, the right to consent and otherwise act with respect thereto, with power to designate one or more Persons to exercise any of said rights, powers and privileges in respect of any of said investments.  The Trustees shall not be limited by any law limiting the investments that may be made by fiduciaries.

                    Section 3.3      Legal Title .  Legal title to all the Series Property shall be vested in the Trustees as joint tenants, except that the Trustees shall have power to cause legal title to any Series Property to be held by or in the name of one or more of the Trustees, or in the name of the Trust, or any Series thereof, or in the name of any other Person as nominee, custodian or pledgee, on such terms as the Trustees may determine, provided that the interest of the Trust or any Series thereof therein is appropriately protected.

                    The right, title and interest of the Trustees in the Series Property shall vest automatically in each Person who may hereafter become a Trustee upon his due election and qualification.  Upon the ceasing of any Person to be a Trustee for any reason, such Person shall automatically cease to have any right, title or interest in any of the Series Property, and the right, title and interest of such Trustee in the Series Property shall vest automatically in the remaining Trustees.  Such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered.

                    Section 3.4      Issuance and Repurchase of Shares .  The Trustees shall have the power to issue, sell, repurchase, redeem, retire, cancel, acquire, hold, resell, reissue, dispose of, transfer, and otherwise deal in, Shares, including Shares in fractional

8


denominations, shall have the power to establish from time to time in accordance with the provisions of Section 5.2 and 5.3 hereof Series and Classes representing interests in the Trust or a Series thereof and, subject to the more detailed provisions set forth in Article VII, shall have the power to apply to any such repurchase, redemption, retirement, cancellation or acquisition of Shares any funds or property of the applicable Series of the Trust whether capital or surplus or otherwise, to the full extent now or hereafter permitted by the laws of the State of Delaware governing business corporations.

                    Section 3.5      Borrow Money or Utilize Leverage .  Subject to the Fundamental Policies in effect from time to time, the Trustees shall have the power to borrow money or otherwise obtain credit or utilize leverage in connection with the activities of any Series to the maximum extent permitted by law, regulation or order and the Fundamental Policies of any Series and to secure the same by mortgaging, pledging or otherwise subjecting as security the assets of such Series, including the lending of portfolio securities, and to endorse, guarantee, or undertake the performance of any obligation, contract or engagement of any other Person; provided, however, that the assets of any particular Series shall not be used as security for any credit extended solely or partially to one or more other Series.

                    Section 3.6      Delegation; Committees .   The Trustees shall have the power, consistent with their continuing exclusive authority over the management of the Trust and the Series Property, to delegate from time to time to such of their number or to officers, employees or agents of the Trust the doing of such things and the execution of such instruments either in the name of the Trust or the applicable Series or the names of the Trustees or otherwise as the Trustees may deem expedient, to at least the same extent as such delegation is permitted to directors of a Delaware business corporation and is permitted by the 1940 Act, as well as any further delegations the Trustees may determine to be desirable, expedient or necessary in order to effect the purpose hereof.  The Trustees may designate one or more committees which shall have all or such lesser portion of the authority of the entire Board of Trustees as the Trustees shall determine from time to time, except to the extent action by the entire Board of Trustees or particular Trustees is required by the 1940 Act.

                    Section 3.7      Collection and Payment .   The Trustees shall have power to collect all property due to any Series of the Trust; to pay all claims, including taxes, against any Series Property, the Trust or any Series of the Trust, the Trustees or any officer, employee or agent of the Trust; to prosecute, defend, compromise or abandon any claims

9


relating to any Series Property, the Trust or any Series of the Trust, the Trustees or any officer, employee or agent of the Trust; to foreclose any security interest securing any obligations, by virtue of which any property is owed to any Series of the Trust; and to enter into releases, agreements and other instruments.  Except to the extent required for a Delaware business corporation, the Shareholders shall have no power to vote as to whether or not a court action, legal proceeding or claim should or should not be brought or maintained derivatively or as a class action on behalf of the Trust, any Series or the Shareholders thereof.

                    Section 3.8      Expenses .  The Trustees shall have power to incur and pay out of the assets or income of any Series of the Trust, any expenses which in the opinion of the Trustees are necessary or appropriate to carry out any of the purposes of this Declaration, and the business of any Series of the Trust, and to pay reasonable compensation from the funds of each Series to themselves as Trustees.  The Trustees shall fix the compensation of all officers, employees and Trustees.  Subject to the 1940 Act, the Trustees may pay themselves such compensation for special services, including legal, underwriting, syndicating and brokerage services, as they in good faith may deem reasonable and reimbursement for expenses reasonably incurred by themselves on behalf of any Series.  The Trustees shall have the power, as frequently as they may determine, to cause each Shareholder, or each Shareholder of any particular Series, to pay directly, in advance or arrears, for charges of distribution, of the custodian or transfer, shareholder servicing or similar agent of such Series or Class, a pro rata amount as defined from time to time by the Trustees, by setting off such charges due from such Shareholder from declared but unpaid dividends or distributions owed such Shareholder and/or by reducing the number of Shares in the account of such Shareholder by that number of full and/or fractional Shares that represent, at the net asset value thereof, the outstanding amount of such charges due from such Shareholder.

                    Section 3.9      By-Laws .  The Trustees shall have the exclusive authority to adopt and from time to time amend or repeal By-Laws for the conduct of the business of the Trust.

                    Section 3.10      Miscellaneous Powers .  The Trustees shall have the power to:  (a) employ or contract with such Persons as the Trustees may deem desirable for the transaction of the business of any Series, including investment advisers, administrators, custodians, transfer agents, shareholder services providers, accountants, counsel, brokers, dealers and others; (b) enter into joint ventures, partnerships and any other combinations

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or associations; (c) purchase, and pay for out of Series Property, insurance policies insuring the Shareholders, Trustees, officers, employees, agents, investment advisers, distributors, selected dealers or independent contractors of any Series against all claims arising by reason of holding any such position or by reason of any action taken or omitted by any such Person in such capacity, whether or not constituting negligence, or whether or not the Trust would have the power to indemnify such Person against such liability; (d) establish pension, profit-sharing, share purchase, and other retirement, incentive and benefit plans for any Trustees, officers, employees and agents of the Trust; (e) make donations, irrespective of benefit to the Trust, for charitable, religious, educational, scientific, civic or similar purposes; (f) to the extent permitted by applicable law, indemnify any Person with whom any Series has dealings, including without limitation any investment adviser, administrator, manager, transfer agent, custodian, distributor or selected dealer, or any other Person as the Trustees may see fit to such extent as the Trustees shall determine; (g) guarantee indebtedness or contractual obligations of others; (h) determine and change the fiscal year of the Trust and the method in which its accounts shall be kept; and (i) adopt a seal for the Trust but the absence of such seal shall not impair the validity of any instrument executed on behalf of the Trust.

                    Section 3.11      Further Powers .  The Trustees shall have the power to conduct the business of the Trust or any Series of the Trust or any Class thereof and carry on its operations in any and all of its branches and maintain offices both within and without the State of Delaware, in any and all states of the United States of America, in the District of Columbia, and in any and all commonwealths, territories, dependencies, colonies, possessions, agencies or instrumentalities of the United States of America and of foreign governments, and to do all such other things and execute all such instruments as they deem necessary, proper or desirable in order to promote the interests of the Trust or any Series of the Trust or any Class thereof although such things are not herein specifically mentioned.  Any determination as to what is in the interests of the Trust or any Series of the Trust or any Class thereof made by the Trustees in good faith shall be conclusive.  In construing the provisions of this Declaration, the presumption shall be in favor of a grant of power to the Trustees. 

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ARTICLE IV

Limitations of Liability and Indemnification

                    Section 4.1      No Personal Liability of Shareholders, Trustees, etc.    No Shareholder of the Trust shall be subject in such capacity to any personal liability whatsoever to any Person in connection with Series Property or the acts, obligations or affairs of the Trust.  Shareholders shall have the same limitation of personal liability as is extended to stockholders of a private corporation for profit incorporated under the general corporation law of the State of Delaware.  No Trustee, officer, employee or agent of the Trust or any Series of the Trust shall be subject in such capacity to any personal liability whatsoever to any Person, other than the Trust or the respective Series or the Shareholders, in connection with Series Property or the affairs of the Trust or the respective Series, save only liability to the Trust or its Shareholders arising from bad faith, willful misfeasance, gross negligence or reckless disregard for his duty to such Person; and, subject to the foregoing exception, all such Persons shall look solely to the Series Property of the affected Series for satisfaction of claims of any nature arising in connection with the affairs of the Trust.  If any Shareholder, Trustee or officer, as such, of the Trust, is made a party to any suit or proceeding to enforce any such liability, subject to the foregoing exception regarding Trustees and officers, he shall not, on account thereof, be held to any personal liability.  Any repeal or modification of this Section 4.1 shall not adversely affect any right or protection of a Trustee or officer of the Trust existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification.

                    Section 4.2      Mandatory Indemnification .   (a)   The Trust hereby agrees, solely out of the assets of the affected Series, to indemnify each Person who at any time serves as Trustee or officer of the Trust (each such Person being an “indemnitee”) against any liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and reasonable counsel fees reasonably incurred by such indemnitee in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which he may be or may have been involved as a party or otherwise or with which he may be or may have been threatened, while acting in any capacity set forth above in this Arti cle IV by reason of his having acted in any such capacity, except with respect to any matter as to which he shall not have acted in good faith in the reasonable belief that his action was in the best interest of the Trust or the respective Series of the Trust and furthermore, in the case of any criminal proceeding, as to which he shall have had reasonable cause to believe that the conduct was unlawful, provided, however, that no indemnitee shall be indemnified hereunder against any liability to any Person or any expense of such indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence, or (iv) reckless disregard of the duties involved in the conduct of his position. 

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Notwithstanding the foregoing, with respect to any action, suit or other proceeding voluntarily prosecuted by any indemnitee as plaintiff, indemnification shall be mandatory only if the prosecution of such action, suit or other proceeding by such indemnitee was (1) authorized by a majority of the Trustees or (2) was instituted by the indemnitee to enforce his or her rights to indemnification hereunder in a case in which the indemnitee is found to be entitled to such indemnification.  The rights to indemnification set forth in this Declaration shall continue as to a Person who has ceased to be a Trustee or officer of the Trust and shall inure to the benefit of his or her heirs, executors and personal and legal representatives.  No amendment or restatement of this Declaration or repeal of any of its provisions shall limit or eliminate any of the benefits provided to any Person who at any time is or was a Trustee or officer of the Trust or otherwise entitled to indemnification hereunder in respect of any act or omission that occurred prior to such amendment, restatement or repeal.

                         (b)     Notwithstanding the foregoing, no indemnification shall be made hereunder unless there has been a determination (1) by a final decision on the merits by a court or other body of competent jurisdiction before whom the issue of entitlement to indemnification hereunder was brought that such indemnitee is entitled to indemnification hereunder or, (2) in the absence of such a decision, by (i) a majority vote of a quorum (being one-third of such Trustees) of those Trustees who are neither Interested Persons of the Trust nor parties to the proceeding (“Disinterested Non-Party Trustees”), that the indemnitee is entitled to indemnification hereunder, or (ii) if such quorum is not obtainable or even if obtainable, if such majority so directs, independent legal counsel in a written opinion conclude that the indemnitee should be entitled to indemnification hereunder.  All determinations to make advance payments in connection with the expense of defending any proceeding shall be authorized and made in accordance with the immediately succeeding paragraph (c) below.

                         (c)     The Trust shall make advance payments in connection with the expenses of defending any action with respect to which indemnification might be sought hereunder if the Trust receives a written affirmation by the indemnitee of the indemnitee’s good faith belief that the standards of conduct necessary for indemnification have been met and a written undertaking to reimburse the Trust unless it is subsequently determined that indemnitee is entitled to such indemnification and if a majority of the Trustees determine that the applicable standards of conduct necessary for indemnification appear to have been met.  In addition, at least one of the following conditions must be met:  (1) the indemnitee shall provide adequate security for his undertaking, (2) the Trust shall be insured against losses arising by reason of any lawful advances, or (3) a majority of a quorum of the

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Disinterested Non-Party Trustees, or if a majority vote of such quorum so directs, independent legal counsel in a written opinion, shall conclude, based on a review of readily available facts (as opposed to a full trial-type inquiry), that there is substantial reason to believe that the indemnitee ultimately will be found entitled to indemnification.

                         (d)     The rights accruing to any indemnitee under these provisions shall not exclude any other right to which he or she may be lawfully entitled.

                         (e)     Subject to any limitations provided by the 1940 Act and this Declaration, the Trust shall have the power and authority, solely out of the assets of the affected Series, to indemnify and provide for the advance payment of expenses to employees, agents and other Persons providing services to the Trust or serving in any capacity at the request of the Trust to the full extent as corporations organized under the Delaware General Corporation Law may indemnify or provide for the advance payment of expenses for such Persons provided that such indemnification has been approved by a majority of the Trustees.

                    Section 4.3      No Duty of Investigation; Notice in Trust Instruments, etc.    No purchaser, lender, transfer agent or other Person dealing with the Trustees or with any officer, employee or agent of the Trust or any Series of the Trust or Class thereof shall be bound to make any inquiry concerning the validity of any transaction purporting to be made by the Trustees or by said officer, employee or agent or be liable for the application of money or property paid, loaned, or delivered to or on the order of the Trustees or of said officer, employee or agent.  Every obligation, contract, undertaking, instrument, certificate, Share, other security of the Trust or any Series of the Trust, and every other act or thing whatsoever executed in connection with the Trust or any Series of the Trust shall be conclusively taken to have been executed or done by the executors thereof only in their capacity as Trustees under this Declaration or in their capacity as officers, employees or agents of the Trust.   The Trustees may maintain insurance for the protection of the Series Property, the Shareholders of each Series, Trustees, officers, employees and agents in such amount as the Trustees shall deem adequate to cover possible liability, and such other insurance as the Trustees in their sole judgment shall deem advisable or is required by the 1940 Act.

                    Section 4.4      Reliance on Experts, etc .  Each Trustee and officer or employee of the Trust or any Series of the Trust shall, in the performance of his duties, be fully and completely justified and protected with regard to any act or any failure to act

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resulting from reliance in good faith upon the books of account or other records of the Trust or any Series of the Trust or Class thereof, upon an opinion of counsel, or upon reports made to the Trust or any Series thereof by any of the Trust’s officers or employees or by any advisor, administrator, manager, distributor, selected dealer, accountant, appraiser or other expert or consultant selected with reasonable care by the Trustees, officers or employees of the Trust, regardless of whether such counsel or other expert may also be a Trustee.

ARTICLE V

Shares of Beneficial Interest

                    Section 5.1      Beneficial Interest .  The interest of the beneficiaries hereunder shall be represented by an unlimited number of transferable shares of beneficial interest, par value $.001 per share.  All Shares issued in accordance with the terms hereof, including, without limitation, Shares issued in connection with a dividend in Shares or a split of Shares, shall be fully paid when the consideration determined by the Trustees (if any) therefor shall have been received by the Trust.  The power to make certain changes against Shareholders and their Shares shall not be considered assessments for the foregoing purpose.

                    Section 5.2      Series Designation .   The Trustees, in their discretion from time to time, may authorize the reclassification of Shares into one or more Series, each Series relating to a separate portfolio of investments and each of which Series shall be a separate and distinct subtrust of the Trust.  Each Series so established hereunder shall be deemed to be a separate trust under the provisions of Delaware law.  The Trustees shall have exclusive power without the requirement of Shareholder approval to establish and designate such separate and distinct Series and to fix and determine the relative rights and preferences as between the different Series.  The establishment and designation of any Series shall be effective upon the execution or approval by a majority of the Trustees of an instrument or resolution setting forth the establishment and designation of such Series (or when authorized to do so, by any officer of the Trust pursuant to the vote of a majority of the Trustees of the Trust).  Such instrument shall also set forth any rights and preferences of such Series which are in addition to the rights and preferences of Shares set forth in this Declaration.  At any time that there are no Shares outstanding of any particular Series previously established and designated, the Trustees may by an instrument or resolution

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executed or approved by a majority of their number abolish or alter that Series and the establishment and designation thereof.  Each instrument referred to in this paragraph shall have the status of an amendment to this Declaration. 

                    Section 5.3      Class Designation .   The Trustees, in their discretion from time to time, may authorize the reclassification of Shares of any Series into one or more Classes of Shares, all the assets of which Series shall remain commingled and not allocated among the different Classes thereof.  The Trustees shall have exclusive power without the requirement of Shareholder approval to establish and designate such separate and distinct Classes and to fix and determine the relative rights, terms, conditions and expenses applicable to each Class of Shares to the maximum extent permitted by the 1940 Act.  The establishment and designation of any Class of Shares shall be effective upon the execution or approval by a majority of the Trustees of an instrument or resolution setting forth the establishment and designation of such Class (or when authorized to do so, by an officer of the Trust pursuant to the vote of a majority of the Trustees of the Trust).  At any time that there are no Shares outstanding of any particular Class previously established and designated, the Trustees may, by an instrument or resolution executed or approved by a maj ority of the Trustees,  abolish or alter that Class and the establishment and designation thereof.

                    Section 5.4      Description of Shares .    If the Trustees shall create sub_trusts and reclassify the Shares into one or more Series or create Classes of Shares, the following provisions shall be applicable:

                                  (a)      Number of Shares .  The number of Shares of each Series or Class that may be issued shall be unlimited.  The Trustees may, but shall not be required to, classify or reclassify any unissued Shares or any Shares previously issued and reacquired of any Series or Class into one or more Series or Classes that may be established and designated from time to time.  The Trustees may, but shall not be required to, hold redeemed Shares as treasury Shares (of the same or some other Series or Class), reissue such Shares for such consideration and on such terms as they may determine, or cancel any Shares of any Series or Class reacquired by the Trust at their discretion from time to time.

                                  (b)      Investment of Property .  The power of the Trustees to invest and reinvest the Trust Property of each Series that may be established shall be governed by Section 3.2 of this Declaration.

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                                  (c)      Allocation of Assets .  All consideration received by the Trust for the issue or sale of Shares of a particular Series or Class of such Series, together with all assets in which such consideration is invested or reinvested, all income, earnings, profits, and proceeds thereof, including any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payment derived from any reinvestment of such proceeds in whatever form the same may be, together with such Series’ or or Class’s share of any other assets of the Trust, shall be held by the Trustees and Trust for the benefit of the Shareholders of such Series and, subject to the rights of creditors of such Series only, shall irrevocably belong to that Series for all purposes, and shall be so recorded upon the books of account of the Trust.  In the event that there are any assets, income, earnings, profits, and proceeds thereof, funds or payments that are not readily identifiable as belonging to any particular Series, such assets shall be allocated among the Series in proportion to their net assets as a proportion of the total net assets of the Trust unless the Trustees shall have affirmatively allocated them among any one or more of the Series established and designated from time to time in any other manner or basis as they, in their sole discretion, deem fair and equitable, and anything so allocated to a Series shall belong to such Series.  Each such allocation shall be conclusive and binding upon the Shareholders of all Series and for all purposes.

                                  (d)      Allocation of Liabilities .  The assets belonging to each particular Series or attributable to each particular Class of such Series shall be charged with the liabilities of the Trust in respect of that Series or Class and with all expenses, costs, charges and reserves attributable to that Series or Class, and any general liabilities, expenses, costs, charges or reserves of the Trust that are not readily identifiable as being attributable to any particular Series or Class shall be allocated and charged against assets of the Series and Classes of each Series in proportion to their net assets as a proportion of the total net assets of the Trust unless the Trustees shall have affirmatively allocated them among any one or more of th e Series or Classes established and designated from time to time in any other manner or basis as the Trustees in their sole discretion deem fair and equitable; provided that any incremental expenses allocated to one or more Classes of Shares on a basis other than the relative net asset values of the respective Classes shall be allocated in a manner consistent with the 1940 Act.  Each allocation of liabilities, expenses, costs, charges and reserves by the Trustees shall be conclusive and binding upon the Shareholders of all Series and Classes for all purposes.  The Trustees shall have full discretion, to the extent not inconsistent with the 1940 Act, to determine which items shall be treated as income and which items as capital, and each such determination and

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allocation shall be conclusive and binding upon the Shareholders.  Under no circumstances shall the assets allocated or belonging to a particular Series or attributable to a particular Class be charged with any liabilities attributable to another Series or Class.  Any creditor may look only to the assets of the particular Series with respect to which such Person is a creditor for satisfaction of such creditor’s debt.

                                  (e)      Dividends .  The power of the Trust to pay dividends and make distributions with respect to any one or more Series shall be governed by Section 5.12 of this Trust.  Dividends and distributions on Shares of a particular Series may be paid with such frequency as the Trust may determine, which may be daily or otherwise, pursuant to a standing resolution or resolutions adopted only once or with such frequency as the Trust may determine, to the holders of Shares of that Series, from such of the income and capital gains, accrued or realized, from the assets belonging to that Series, as the Trust may determine, after providing for actual and accrued liabilities belonging to that Series.  All dividends and distributions on each Class of a Series shall be distributed pro rata to the holders of Shares of that Class in proportion to the number of Shares of that Class held by such holders at the date and time of record established for the payment of such dividends or distributions, and such dividends and distributions need not be pro rata with respect to dividends and distributions paid to Shares of any other Class of such Series.  Dividends and distributions shall be paid with respect to Shares of a given Class only out of lawfully available assets attributable to such Class.

                    Section 5.5      Rights of Shareholders .   The Shares shall be personal property giving only the rights in this Declaration specifically set forth.  The ownership of the Trust Property of every description and the right to conduct any business herein before described are vested exclusively in the Trustees, and the Shareholders shall have no interest therein other than the beneficial interest conferred by their Shares with respect to a particular Series or Class, and they shall have no right to call for any partition or division of any property, profits, rights or interests of the Trust nor can they be called upon to share or assume any losses of the Trust or, subject to the right of the Trustees to charge certain expenses directly to Shareholders, as provided in the last sentence of Section 3.8, suffer an assessment of any kind by virtue of their ownership of Shares.  The Shares shall not entitle the holder to preference, preemptive, appraisal, conversion or exchange rights (except as specified in Section 8.4 or as specified by the Trustees in the designation or redesignation of any Series or Class thereof).

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                    Section 5.6      Trust Only .  It is the intention of the Trustees to create only the relationship of Trustee and beneficiary between the Trustees and each Shareholder from time to time.  It is not the intention of the Trustees to create a general partnership, limited partnership, joint stock association, corporation, bailment or any form of legal relationship other than a trust.  Nothing in this Declaration shall be construed to make the Shareholders, either by themselves or with the Trustees, partners, members or shareholders of any such entity.

                    Section 5.7      Issuance of Shares .  The Trustees, in their discretion, may from time to time without the vote of the Shareholders issue Shares with respect to any Series that may have been established pursuant to Section 5.2, in addition to the then issued and outstanding Shares and Shares held in the treasury, to such party or parties and for such amount and type of consideration, including cash or property, at such time or times, and on such terms as the Trustees may determine, and may in such manner acquire other assets (including the acquisition of assets subject to, and in connection with the assumption of, liabilities) and businesses.  The Trustees may from time to time divide or combine the Shares of any Series into a greater or lesser number without thereby changing the proportionate beneficial interest in such Series of the Trust.  Issuances and redemptions of Shares may be made in whole Shares and/or l/l,000ths of a Share or multiples thereof as the Trustees may determine.

                    Section 5.8      Register of Shares .   One or more registers shall be kept at the offices of the Trust or any transfer agent duly appointed by the Trustees under the direction of the Trustees which registers shall contain the names and addresses of the Shareholders and the number of Shares of each Series and Class thereof held by them respectively and a record of all transfers thereof.  Such registers shall be conclusive as to who are the holders of the Shares of the applicable Series and Classes thereof and who shall be entitled to receive dividends or distributions or otherwise to exercise or enjoy the rights of Shareholders.  No Shareholder shall be entitled to receive payment of any dividend or distribution, nor to have notice given to him as herein provided, until he or she has given his or her address to a transfer agent or such other officer or agent of the Trustees as shall keep the register for entry thereon.  It is not contemplated that certificates will be issued for the Shares; however, the Trustees, in their discretion, may authorize the issuance of share certificates and promulgate appropriate fees therefor and rules and regulations as to their use.

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                    Section 5.9      Transfer of Shares .  Shares shall be transferable on the records of the Trust only by the record holder thereof or by its agent thereto duly authorized in writing, upon delivery to the Trustees or a transfer agent of the Trust of a duly executed instrument of transfer, together with such evidence of the genuineness of each such execution and authorization and of other matters as may reasonably be required.  Upon such delivery, the transfer shall be recorded on the applicable register of the Trust.  Until such record is made, the Shareholder of record shall be deemed to be the holder of such Shares for all purposes hereof, and none of the Trustees, transfer agent, registrar, officers, employees or agents of the Trust shall be affected by any notice of the proposed transfer.

                    Any Person becoming entitled to any Shares in consequence of the death, bankruptcy, or incompetence of any Shareholder, or otherwise by operation of law, shall be recorded on the applicable register of Shares as the holder of such Shares upon production of the proper evidence thereof to the Trustees or a transfer agent of the Trust, but until such record is made, the Shareholder of record shall be deemed to be the holder of such for all purposes hereof, and none of the Trustees, transfer agent, registrar, officers, employees or agents of the Trust shall be affected by any notice of such death, bankruptcy or incompetence, or other operation of law.

                    Section 5.10      Notices .  Any and all notices to which any Shareholder hereunder may be entitled and any and all communications to any Shareholder shall be deemed duly served or given if mailed, postage prepaid, addressed to any Shareholder of record at his or her last known address as recorded on the applicable register of the Trust and may be sent together with any such notice or other communication to another Shareholder at the same address.

                    Section 5.11      Net Asset Value .  The value of the assets of the Trust or any Series of the Trust or any Class of such Series, the amount of liabilities of the Trust or any Series of the Trust or any Class of such Series and the net asset value of each outstanding Share of any Series or Class shall be determined at such time or times and on such days as the Trustees may determine in accordance with the 1940 Act.  The method of determination of net asset value shall be determined by the Trustees.  The power and duty to value the assets and liabilities of the Trust and make net asset value determinations and calculations may be delegated by the Trustees.

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                    Section 5.12      Distributions to Shareholders .

                                  (a)     The Trust shall from time to time distribute among the Shares such proportion of the net profits, surplus (including paid-in surplus), capital, or assets held by the Trustees as they or any Persons to whom they delegate such determination may deem proper or as may otherwise be determined in the instrument setting forth the terms of such Series or Class of Shares, which need not be ratable with respect to distributions in respect of Shares of any other Class.  Such distributions may be made in cash or property (including without limitation any type of obligations of the Trust or any assets thereof) or any combination thereof.

                                  (b)     Distributions may be made to the Shareholders of record entitled to such distribution at the time such distribution is declared or at such later date as shall be determined by the Trust prior to the date of payment.

                                  (c)     The Trust may always retain from any source such amount as the Trustees or their delegate may deem necessary to pay the debts or expenses of the Trust or to meet obligations of the Trust, or as the Trustees or their delegate otherwise may deem desirable to use in the conduct of its affairs or to retain for future requirements or extensions of the business of the Trust.

ARTICLE VI

Shareholders

                    Section 6.1      Meetings of Shareholders .  The Trust may, but shall not be required to, hold annual meetings of the Shareholders of any or all of the Classes or Series.  An annual or special meeting of Shareholders may be called at any time only by the Trustees.  Any meeting of Shareholders shall be held within or without the State of Delaware on such day and at such time as the Trustees shall designate.

                    Section 6.2      Voting .  Shareholders shall have no power to vote on any matter, except matters on which a vote of Shares is expressly required by applicable law, this Declaration or resolution of the Trustees.  In particular, no amendment of this Declaration, and no merger, consolidation, share exchange or sale of assets of the Trust or any Series thereof, and no conversion of the Trust to any other form of organization or any other action of the Trust or Series thereof shall require any vote or other approval of any of

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the Shareholders, except as provided by the foregoing sentence.  Any matter required to be submitted for approval of any of the Shares and affecting more than one Series or Class shall require approval by the required vote of Shares of the affected Series or Classes voting together as a single Series or Class and, if such matter affects one or more Series or Classes thereof differently from one or more other Series or Classes, approval, to the extent provided by applicable law, this Declaration or resolution of the Trustees, by the required vote of Shares of each such Series or Class voting as a separate Series or Class shall be required in order to be approved with respect to such Series or Class; provided, however, that except to the extent required by the 1940 Act, there shall be no separate class votes on the election or removal of Trustees or the selection of auditors for the Trust and its Series.  Shareholders of a particular Series shall not be entitled to vote on any matter that affects the rights or interests of only one or more other Series.  There shall be no cumulative voting in the election or removal of Trustees.

                    Section 6.3      Notice of Meeting, Shareholder Proposals and Record Date .  Notice of all meetings of Shareholders, stating the time, place and purposes of the meeting, shall be given by the Trustees by mail to each Shareholder of record entitled to vote thereat at its registered address, mailed at least 10 days before the meeting or otherwise in compliance with applicable law.  Except with respect to an annual meeting, at which any business required by the 1940 Act may be conducted, only the business stated in the notice of the meeting shall be considered at such meeting.  Subject to the provisions of applicable law, any Shareholder wishing to include a proposal to be considered at an annual meeting must submit such proposal to the Secretary of the Trust at least 30 days in advance of such meeting. Any adjourned meeting may be held as adjourned one or more times without further notice not later than 130 days after the record date.  For the purposes of determining the Shareholders who are entitled to notice of and to vote at any meeting the Trustees may, without closing the transfer books, fix a date not more than 100 days prior to the date of such meeting of Shareholders as a record date for the determination of the Persons to be treated as Shareholders of record for such purposes.

                    Section 6.4      Quorum and Required Vote .

                          (a)     The holders of one-third of the outstanding Shares of the Trust on the record date present in person or by proxy shall constitute a quorum at any meeting of the Shareholders for purposes of conducting business on which a vote of all Shareholders of the Trust is being taken.  The holders of one-third of the outstanding Shares of the

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affected Series or Classes on the record date present in person or by proxy shall constitute a quorum at any meeting of the Shareholders for purposes of conducting business on which a vote of Shareholders of such Series or Classes, respectively, is being taken.  Shares underlying a proxy as to which a broker or other intermediary states its absence of authority or lack of instruction to vote with respect to one or more matters or fails to abstain or vote on or against one or more matters shall be treated as present for purposes of establishing a quorum or proportion of shares voted for taking action on any such matter only to the extent so determined by the Trustees at or prior to the meeting of Shareholders at which such matter is to be considered.

                         (b)     Subject to any provision of applicable law, this Declaration or a resolution of the Trustees specifying or requiring a greater or lesser vote requirement for the transaction of any matter of business at any meeting of Shareholders, (i) the affirmative vote of a plurality of the Shares entitled to vote for the election of any Trustee or Trustees shall be the act of such Shareholders with respect to the election of such Trustee or Trustees, (ii) the affirmative vote of a majority of the Shares present in person or represented by proxy on any other matter and entitled to vote on such matter shall be the act of the Shareholders with respect to such  matter, and (iii) where a separate vote of any Series or Class is required on any matter, the affirmative vote of a majority of the Shares of such Series or Class present in person or represented by proxy on such matter and entitled to vote on such matter shall be the act of the Shareholders of such Series or Class with respect to such matter.

                    Section 6.5      Proxies, etc.    At any meeting of Shareholders, any holder of Shares entitled to vote thereat may vote by proxy, provided that no proxy shall be voted at any meeting unless it shall have been placed on file with the Secretary, or with such other officer or agent of the Trust as the Secretary may direct, for verification prior to the time at which such vote shall be taken.  Pursuant to a resolution of a majority of the Trustees, proxies may be solicited in the name of one or more Trustees or one or more of the officers or employees of the Trust.  Only Shareholders of record shall be entitled to vote.  Each full Share shall be entitled to one vote and each fractional Share shall be entitled to a vote equal to its fraction of a full Share.  When any Share is held jointly by several Persons, any one of them may vote at any meeting in person or by proxy in respect of such Share, but if more than one of them shall be present at such meeting in person or by proxy, and such joint owners or their proxies so present disagree as to any vote to be cast, such vote shall not be received in respect of such Share.  A proxy purporting to be given by or on behalf of a Shareholder of record on the record date for a meeting shall be deemed

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valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger.  If the holder of any such Share is a minor or a Person of unsound mind, and subject to guardianship or to the legal control of any other Person as regards the charge or management of such Share, he or she may vote by his or her guardian or such other Person appointed or having such control, and such vote may be given in person or by proxy.  The Trustees shall have the authority to make and modify from time to time regulations regarding the validity of proxies.  In addition to signed proxies, such regulations may authorize facsimile, telephonic, internet and other methods of appointing a proxy that are subject to such supervision by or under the direction of the Trustees as the Trustees shall determine.

                    Section 6.6      Reports .  The Trustees shall cause to be prepared and sent to Shareholders at least annually and more frequently to the extent and in the form required by law, regulation or any exchange on which Shares are listed a report of operations containing  financial statements of the Trust prepared in conformity with generally accepted accounting principles and applicable law.  Separate reports may be prepared for the various Series.  Copies of such reports shall be mailed to all Shareholders of record of the applicable Series within the time required by the 1940 Act, and in any event within a reasonable period preceding the meeting of Shareholders.  The Trustees may prepare and send to Shareholders of any Series or Class any other reports.

                    Section 6.7      Inspection of Records .  The records of the Trust shall be open to inspection by Persons who have been holders of record of at least $25,000 in net asset value or liquidation preference of Shares for a continuous period of not less than six months to the same extent and for the same purposes as is permitted under the Delaware General Business Corporation Law to shareholders of a Delaware business corporation.

                    Section 6.8      Shareholder Action by Written Consent .  Any action which may be taken by Shareholders by vote may be taken without a meeting if the holders of all of the Shares entitled to vote thereon consent to the action in writing and the written consents are filed with the records of the meetings of Shareholders.  Such consent shall be treated for all purposes as a vote taken at a meeting of Shareholders.

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ARTICLE VII

Redemption

                    Section 7.1      Redemptions .  All outstanding Shares of any Series of the Trust or any Class thereof may be redeemed at the option of the holders thereof, upon and subject to the terms and conditions provided in this Article VII.  The Trust shall, upon application by any Shareholder or pursuant to authorization from any Shareholder of a particular Series or Class, redeem or repurchase from such Shareholder outstanding Shares of such Series or Class for an amount per share determined by the application of a formula adopted for such purpose by the Trustees with respect to such Series or Class (which formula shall be consistent with the 1940 Act);  provided that (a) such amount per share shall not exceed any limitations imposed under applicable law and (b) if so authorized by the Trustees, the Trust may, at any time and from time to time, charge fees for effecting such redemption, at such rates as the Trustees may establish, as and to the extent permitted under the 1940 Act, and may, at any time and from time to time, pursuant to such Act, suspend such right of redemption.  The procedures for effecting redemption shall be as set forth in the Prospectus with respect to the applicable Series or Class from time to time.  The proceeds of the redemption of Shares shall be paid in cash or property (tangible or intangible) or any combination thereof in the sole discretion of the Trustees or, if not determined by them, the Trust’s investment adviser.

                    Section 7.2      Disclosure of Holding .  The holders of Shares shall upon demand disclose to the Trustees in writing such information with respect to direct and indirect ownership of Shares as the Trustees deem necessary to comply with the provisions of the Code or any other applicable laws.

                    Section 7.3      Redemptions of Small Accounts .  The Trustees shall have the power to redeem shares of any Series or Class at a redemption price determined in accordance with Section 7.1 above, (a) if at any time the total investment in such account does not have a value of at least such minimum amount as may be specified in the Prospectus for such Series or Class from time to time, (b) as provided by Section 3.8, or (c) to the extent a Shareholder or other Person beneficially owns Shares equal to or in excess of a percentage of Shares of the Trust or any Series or Class determined from time to time by the Trustees and specified in the applicable Prospectus.  In the event the Trustees determine to exercise their power to redeem Shares provided in subsection (a) of this Section 7.3, the Shareholder shall be notified that the value of his account is less than the applicable minimum amount and shall be allowed 30 days to make an appropriate investment before redemption is processed.

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ARTICLE VIII

Duration:  Termination of Trust; Amendment; Mergers, Etc.

                    Section 8.1      Duration .  Subject to termination in accordance with the provisions of Section 8.2 hereof, the Trust created hereby shall have perpetual existence.

                    Section 8.2      Termination .

                         (a)     The Trust or any Series may be dissolved by the affirmative vote of a majority of the Trustees, and without any vote of the Shareholders thereof, except as may be required by the 1940 Act.  Upon the dissolution of the Trust or any Series:

 

                            (1)     The Trust or such Series shall carry on no business, except for the purpose of winding up its affairs.

 

 

 

                            (2)     The Trustees shall proceed to wind up the affairs of the Trust or such Series and all of the powers of the Trustees under this Declaration shall continue until the affairs of the Trust or such Series shall have been wound up, including the power to fulfill or discharge the contracts of the Trust or such Series, collect its assets, sell, convey, assign, exchange, merge where the Trust is not the survivor, transfer or otherwise dispose of all or any part of the remaining Trust Property to one or more Persons at a public or private sale for consideration which may consist in whole or in part in cash, securities or other property of any kind, discharge or pay its liabilities, and do all other acts appropriate to liquidate its business; provided that any sale , conveyance, assignment, exchange, merger in which the Trust is not the survivor, transfer or other disposition of all or substantially all the Trust Property of the Trust or any Series shall require approval of the principal terms of the transaction and the nature and amount of the consideration with the same vote as required for dissolution pursuant to paragraph (a) above.

26


 

                            (3)     After paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and refunding agreements, as they deem necessary for their protection, the Trustees may distribute the remaining Trust Property of the Trust or any Series, in cash or in kind or partly in each, among the Shareholders of such Series according to their respective rights.

                         (b)     After the winding up and termination of the Trust or any Series and distribution to the Shareholders as herein provided, a majority of the Trustees shall execute and lodge among the records of the Trust an instrument in writing setting forth the fact of such termination and shall execute and file a certificate of cancellation with the Secretary of State of the State of Delaware.  Upon termination of the Trust, the Trustees shall thereupon be discharged from all further liabilities and duties hereunder, and the rights and interests of all Shareholders shall thereupon cease.

                    Upon termination of any Series, the Trustees shall thereunder be discharged from all further liabilities and duties with respect to such Series, and the rights and interests of all Shareholders of such Series shall thereupon cease.

                    Section 8.3      Amendment Procedure .

                         (a)     Subject to Section 8.3(b), this Declaration may be amended in any respect by the affirmative vote or approval in writing of two-thirds of the Trustees and without any vote of the Shareholders of the Trust or any Series or Class, except as may be required by the 1940 Act.

                         (b)     Nothing contained in this Declaration shall permit the amendment of this Declaration to impair the exemption from personal liability of the Shareholders, Trustees, officers, employees and agents of the Trust or to permit assessments upon Shareholders.  Expenses of the Trust charged directly to Shareholders pursuant to Section 3.8 hereof or fees or sales charges payable upon or in connection with redemptions of Shares pursuant to Section 7.1 hereof shall not constitute “assessments” for purposes of this Section 8.3(b).

                         (c)     An amendment duly adopted by the requisite approval of the Board of Trustees and, if required, Shareholders as aforesaid, shall become effective at the time of such adoption or at such other time as may be designated by the Board of Trustees

27


or Shareholders, as the case may be.  A certification signed by a majority of the Trustees setting forth an amendment and reciting that it was duly adopted by the Trustees and, if required, Shareholders as aforesaid, or a copy of the Declaration, as amended, and executed by a majority of the Trustees, shall be conclusive evidence of such amendment when lodged among the records of the Trust or at such other time designated by the Board.

                    Notwithstanding any other provision hereof, until such time as Shares are issued and outstanding, this Declaration may be terminated or amended in any respect by the affirmative vote of a majority of the Trustees or by an instrument signed by a majority of the Trustees.

                    Section 8.4      Merger, Consolidation and Sale of Assets .  The Trust or any Series may merge or consolidate with any other corporation, association, trust or other organization or any Series, sub-trust or other designated portion thereof or may sell, lease or exchange all or substantially all of the Trust Property or the property of any Series including its good will or may acquire all or substantially all of the property of any other corporation, association, trust or other organization or any series, sub-trust or other designated portion thereof, upon such terms and conditions and for such consideration when and as authorized by two-thirds of the Trustees and without any vote by the Shareholders of the Trust or any Series or Class, except as may be required by the 1940 Act, and any such merger, consolidation, sale, lease,  exchange or purchase shall be determined for all purposes to have been accomplished under and pursuant to the statutes of the State of Delaware.

ARTICLE IX

Miscellaneous

                    Section 9.1      Filing .  This Declaration and any amendment or supplement hereto shall be filed in such places as may be required or as the Trustees deem appropriate.  Each amendment or supplement shall be accompanied by a certificate signed and acknowledged by a Trustee stating that such action was duly taken in a manner provided herein, and shall, upon insertion in the Trust’s minute book, be conclusive evidence of all amendments contained therein.  A restated Declaration, containing the original Declaration and all amendments and supplements theretofore made, may be executed from time to time

28


by a majority of the Trustees and shall, upon insertion in the Trust’s minute book, be conclusive evidence of all amendments and supplements contained therein and may thereafter be referred to in lieu of the original Declaration and the various amendments thereto.

                    Section 9.2      Resident Agent .  The Trust shall maintain a resident agent in the State of Delaware, which agent shall initially be The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801, County of New Castle.  The Trustees may designate a successor resident agent, provided, however, that such appointment shall not become effective until written notice thereof is delivered to the office of the Secretary of the State.

                    Section 9.3      Governing Law .  This Declaration is executed by a majority of the Trustees for the purpose of creating a “statutory trust” under the Delaware Statutory Trust Statute and establishing this Declaration as the “governing instrument” of the Trust within the meaning of the Delaware Statutory Trust Statute.  The rights of all Persons hereunder and the validity and construction of every provision hereof shall be subject to and construed according to the laws of said State of Delaware and reference shall be specifically made to the business corporation law of the State of Delaware as to the construction of matters not specifically covered herein or as to which an ambiguity exists, although such law shall not be viewed as limiting the powers otherwise granted to the Trustees hereunder and any ambiguity shall be viewed in favor of such powers.

                    Section 9.4      Counterparts .  This Declaration may be simultaneously executed in several counterparts, each of which shall be deemed to be an original, and such counterparts, together, shall constitute one and the same instrument, which shall be sufficiently evidenced by any such original counterpart.

                    Section 9.5      Reliance by Third Parties .  Any certificate executed by an individual who, according to the records of the Trust, or of any recording office in which this Declaration may be recorded, appears to be a Trustee hereunder, certifying to the existence of any fact or facts which in any manner relate to the affairs of the Trust shall be conclusive evidence as to the matters so certified in favor of any Person dealing with the Trust.

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                    Section 9.6      Provisions in Conflict with Law or Regulation .

                         (a)     The provisions of this Declaration are severable, and if the Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with the 1940 Act, the regulated investment company provisions of the Code or with other applicable laws and regulations, the conflicting provision shall be deemed never to have constituted a part of this Declaration to the extent of such conflict; provided, however, that such determination shall not affect any of the remaining provisions of this Declaration or render invalid or improper any action taken or omitted prior to such determination.

                         (b)     If any provision of this Declaration shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of this Declaration in any jurisdiction.

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                    IN WITNESS WHEREOF, the undersigned has caused these presents to be executed as of the 27th  day of February 2006.

By:     

/s/ R. JOSEPH DOUGHERTY

 

 

R. Joseph Dougherty, as sole initial Trustee and not individually

 

 

 

 

31

BY-LAWS

OF

HIGHLAND FUNDS I


TABLE OF CONTENTS

 

Page

 

ARTICLE I

Shareholder Meetings

 

 

1.1  Chairman

1

1.2  Proxies; Voting

1

1.3  Fixing Record Dates

1

1.4  Inspectors of Election

1

1.5  Records at Shareholder Meetings

2

 

 

ARTICLE II

Trustees

 

 

2.1  Annual and Regular Meetings

2

2.2  Chairman; Records

3

 

 

ARTICLE III

Officers

 

 

3.1  Officers of the Trust

3

3.2  Election and Tenure

3

3.3  Removal of Officers

3

3.4  Bonds and Surety

3

3.5  President, and other Officers

4

3.6  Secretary

4

3.7  Treasurer

4

3.8  Assistant Treasurer

5

3.9  Other Officers and Duties

5

 

 

ARTICLE IV

Miscellaneous

 

 

4.1  Signatures

6

4.2  Seal

6

 

 

ARTICLE V

Amendment of By-Laws

 

 

5.1  Amendment and Repeal of By-Laws

6

 

 

i


HIGHLAND FUNDS I
BY-LAWS

                    These By-Laws are made and adopted pursuant to Section 3.9 of the Agreement and Declaration of Trust establishing Highland Funds I as of February 27, 2006, as from time to time amended (hereinafter called the “Declaration”).  All words and terms capitalized in these By-Laws shall have the meaning or meanings set forth for such words or terms in the Declaration.

ARTICLE I

Shareholder Meetings

                    1.1  Chairman .  The Chairman, if any, shall act as chairman at all meetings of the Shareholders; in the Chairman’s absence, the Trustee or Trustees present at each meeting may elect a temporary chairman for the meeting, who may be one of themselves.

                    1.2  Proxies; Voting .  Shareholders may vote either in person or by duly executed proxy, and each full share or fraction thereof represented at the meeting shall have one vote (or such fraction, as the case may be), all as provided in Article VI of the Declaration.

                    1.3  Fixing Record Dates .  For the purpose of determining the Shareholders who are entitled to notice of or to vote or act at any meeting, including any adjournment thereof, or who are entitled to participate in any dividends, or for any other proper purpose, the Trustees may from time to time, without closing the transfer books, fix or delegate to any officer or the investment adviser of the Trust (the “Investment Adviser”) the fixing of a record date in the manner provided in Section 6.3 of the Declaration.  If the Trustees or the delegate do not prior to any meeting of Shareholders so fix a record date or close the transfer books, then the date of mailing notice of the meeting or the date upon which the dividend resolution is adopted, as the case may be, shall be the record date.

                    1.4  Inspectors of Election .  In advance of any meeting of Shareholders, the Trustees may appoint Inspectors of Election to act at the meeting or any adjournment thereof.  If Inspectors of Election are not so appointed, the Chairman, if any, of any meeting of Shareholders may, and on the request of any Shareholder or Shareholder proxy shall, appoint Inspectors of Election of the meeting.  The number of Inspectors shall be either one or three.  If appointed at the meeting on the request of one or more Shareholders or proxies, a majority of Shares present shall determine whether one or three Inspectors are to be appointed, but failure to allow such determination by the Shareholders shall


not affect the validity of the appointment of Inspectors of Election.  In case any person appointed as Inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the Trustees in advance of the convening of the meeting or at the meeting by the person acting as chairman.  The Inspectors of Election shall determine the number of Shares outstanding, the Shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, shall receive votes, ballots or consents, shall hear and determine all challenges and questions in any way arising in connection with the right to vote, shall count and tabulate all votes or consents, determine the results, and do such other acts as may be proper to conduct the election or vote with fairness to all Shareholders.  If there are three Inspectors of Election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all.  On request of the Chairman, if any, of the meeting, or of any Shareholder or Shareholder proxy, the Inspectors of Election shall make a report in writing of any challenge or question or matter determined by them and shall execute a certificate of any facts found by them.

                    1.5  Records at Shareholder Meetings .  At each meeting of the Shareholders, there shall be made available for inspection at a convenient time and place during normal business hours, if requested by Shareholders, the minutes of the last previous Annual or Special Meeting of Shareholders of the Trust and a list of the Shareholders of the Trust, as of the record date of the meeting or the date of closing of transfer books, as the case may be.  Such list of Shareholders shall contain the name and the address of each Shareholder in alphabetical order and the number of Shares owned by such Shareholder.  Shareholders shall have such other rights and procedures of inspection of the books and records of the Trust as are granted to shareholders of a Delaware business corporation.

ARTICLE II

Trustees

                    2.1  Annual and Regular Meetings .  Meetings of the Trustees shall be held from time to time upon the call of the Chairman, if any, the President, the Secretary or any two Trustees.  Regular meetings of the Trustees may be held without call or notice and shall generally be held quarterly on dates established by the Trustees.  Notice of any other meeting shall be given by the Secretary and shall be delivered to the Trustee orally not less than 24 hours before the meeting or in writing not less than 72 hours before the meeting, but may be waived in writing by any Trustee either before or after such meeting.  The attendance of a Trustee at a meeting shall constitute a waiver of notice of such meeting except where a Trustee attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting has not been lawfully called or

2


convened. Neither the business to be transacted at, nor the purpose of, any meeting of the Board of Trustees need be stated in the notice or waiver of notice of such meeting.

                    2.2  Chairman; Records .  The Chairman, if any, shall be elected by the Trustees from one of their number to serve at the pleasure of the Trustees. Such Chairman, if any, shall act as chairman at all meetings of the Shareholders and Trustees; in the absence of a chairman, the Trustees present shall elect one of their number to act as temporary chairman. The results of all actions taken at a meeting of the Trustees, or by written consent of the Trustees, shall be recorded by the person appointed by the Board of Trustees as the meeting secretary.

ARTICLE III

Officers

                    3.1  Officers of the Trust .  The officers of the Trust shall consist of a President, a Secretary, a Treasurer, an Assistant Treasurer and such other officers or assistant officers as may be elected or authorized by the Trustees. Any two or more of the offices may be held by the same Person, except that the same person may not be both the President and Secretary.

                    3.2  Election and Tenure .  At the initial organizational meeting, the Trustees shall elect a President, Secretary, Treasurer, Assistant Treasurer and such other officers as the Trustees shall deem necessary or appropriate in order to carry out the business of the Trust. Such officers shall serve at the pleasure of the Trustees or until their successors have been duly elected and qualified. The Trustees may fill any vacancy in office or add any additional officers at any time.

                    3.3  Removal of Officers .  Any officer may be removed at any time, with or without cause, by action of a majority of the Trustees. This provision shall not prevent the making of a contract of employment for a definite term with any officer and shall have no effect upon any cause of action which any officer may have as a result of removal in breach of a contract of employment. Any officer may resign at any time by notice in writing signed by such officer and delivered or mailed to the Chairman, if any, President, or Secretary, and such resignation shall take effect immediately upon receipt by the Chairman, if any, President, or Secretary, or at a later date according to the terms of such notice in writing.

3


                    3.4  Bonds and Surety .  Any officer may be required by the Trustees to be bonded for the faithful performance of such officer’s duties in such amount and with such sureties as the Trustees may determine.

                    3.5  President and other Officers .  The President shall be the chief executive officer of the Trust and, subject to the control of the Trustees and any agreements entered into by the Trust with others, shall have general supervision, direction and control of the business of the Trust and of its employees and shall exercise such general powers of management as are usually vested in the office of a President of a corporation. Each officer shall have power in the name and on behalf of the Trust for the benefit of the Trust or any of its Series to execute any and all loans, documents, contracts, agreements, deeds, mortgages, registration statements, applications, requests, filings and other instruments in writing, and to employ and discharge employees and agents of the Trust. Unless otherwise directed by the Trustees, each officer shall have full authority and power, on behalf of all of the Trustees, to attend and to act and to vote, on behalf of the Trust at any meetings of business organizations in which the Trust holds an interest, or to confer such powers upon any other persons, by executing any proxies duly authorizing such persons. The President shall have such further authorities and duties as the Trustees shall from time to time determine. Notwithstanding the foregoing, the President of the Trust shall exercise such general powers of management as are usually vested in the office of a President of a corporation. In the absence or disability of the President and after the President, the Vice-Presidents, if any, in order of their rank as fixed by the Trustees or, if more than one and not ranked, the Vice-President designated by the Trustees or such other officer(s) designated by the Trustees, shall perform all of the duties of the President, and when so acting shall have all the powers of and be subject to all of the restrictions upon the President.

                    3.6  Secretary .  The Secretary shall maintain the minutes of all meetings of, and record all votes of, Shareholders, Trustees and the Executive Committee, if any. The Secretary shall be custodian of the seal of the Trust, if any, and the Secretary (and any other person so authorized by the Trustees) shall affix the seal, or if permitted, facsimile thereof, to any instrument executed by the Trust that would be sealed by a Delaware business corporation executing the same or a similar instrument and shall attest the seal and the signature or signatures of the officer or officers executing such instrument on behalf of the Trust. The Secretary shall also perform any other duties commonly incident to such office in a Delaware business corporation and shall have such other authorities and duties as the Trustees shall from time to time determine.

                    3.7  Treasurer .  Except as otherwise directed by the Trustees, the Treasurer shall have the general supervision of the monies, funds, securities, notes receivables and other valuable papers and documents of the Trust, and shall have and exercise

4


under the supervision of the Trustees and of the President all powers and duties normally incident to the office. The Treasurer may endorse for deposit or collection all notes, checks and other instruments payable to the Trust or to its order. The Treasurer shall deposit all funds of the Trust in such depositories as the Trustees shall designate, and deliver all funds and securities of the Trust which may come into his hands to such company as the Trustees shall employ as Custodian in accordance with the Declaration and applicable provisions of law. The Treasurer shall be responsible for such disbursement of the funds of the Trust as may be ordered by the Trustees or the President. The Treasurer shall keep accurate account of the books of the Trust’s transactions, which shall be the property of the Trust and which together with all other property of the Trust in the Treasurer’s possession, shall be subject at all times to the inspection and control of the Trustees. Unless the Trustees shall otherwise determine, the Treasurer shall be the principal accounting officer of the Trust and shall also be the principal financial officer of the Trust. The Treasurer shall have such other duties and authorities as the Trustees shall from time to time determine. Notwithstanding anything to the contrary herein contained, the Trustees may authorize any adviser, administrator, manager or transfer agent to maintain bank accounts and deposit and disburse funds of any Series of the Trust on behalf of such Series.

                    3.8  Assistant Treasurer .  Any Assistant Treasurer of the Trust shall perform such duties as the Trustees or the Treasurer may from time to time designate, and, in the absence of the Treasurer, the most senior Assistant Treasurer present and able to act may perform all the duties of the Treasurer.

                    3.9  Other Officers and Duties .  The Trustees may elect such other officers and assistant officers as they shall from time to time determine to be necessary or desirable in order to conduct the business of the Trust. Assistant officers shall act generally in the absence of the officer whom they assist and shall assist that officer in the duties of the office. Each officer, employee and agent of the Trust shall have such other duties and authority as may be conferred upon such person by the Trustees or delegated to such person by the President.

5


ARTICLE IV

Miscellaneous

                    4.1  Signatures .  All contracts and other instruments shall be executed on behalf of the Trust by its properly authorized officers, agent or agents, as provided in the Declaration or By-Laws or as the Trustees may from time to time by resolution provide.

                    4.2  Seal .  The Trust is not required to have any seal, and the adoption or use of a seal shall be purely ornamental and be of no legal effect. The seal, if any, of the Trust, or any Series of the Trust, if any, may be affixed to any instrument, and the seal and its attestation may be lithographed, engraved or otherwise printed on any document with the same force and effect as if it had been imprinted and affixed manually in the same manner and with the same force and effect as if done by a Delaware business corporation. The presence or absence of a seal shall have no effect on the validity, enforceability or binding nature of any document or instrument that is otherwise duly authorized, executed and delivered.

ARTICLE V

Amendment of By-Laws

                    5.1  Amendment and Repeal of By-Laws .  In accordance with Section 3.9 of the Declaration, only the Trustees shall have the power to amend or repeal the By-Laws or adopt new By-Laws at any time. Action by the Trustees with respect to the By-Laws shall be taken by an affirmative vote of a majority of the Trustees. The Trustees shall in no event adopt By-Laws that are in conflict with the Declaration, and any apparent inconsistency shall be construed in favor of the related provisions in the Declaration.

6

INVESTMENT ADVISORY AGREEMENT

          AGREEMENT made as of ____________, 2006, by and between Highland Capital Management, L.P., a Delaware limited partnership (the “ Adviser ”), and Highland Funds I, a Delaware statutory trust (the “ Trust ”), on behalf of its series, Highland Equity Opportunities Fund (the “ Fund ”).

          WHEREAS, the Trust is engaged in business as open-end management investment company and is registered as such under the Investment Company Act of 1940, as amended (the “ 1940 Act ”); and

          WHEREAS the Adviser is engaged principally in the business of rendering investment management services and is registered as an investment adviser under the Investment Advisers Act of 1940, as amended;

          NOW, THEREFORE, WITNESSETH:  That it is hereby agreed between the parties hereto as follows:

 

SECTION 1.

Appointment of Adviser .

          The Fund hereby appoints the Adviser to act as manager and investment adviser to the Fund for the period and on the terms herein set forth.  The Adviser accepts such appointment and agrees to render the services herein set forth, for the compensation herein provided.

 

SECTION 2.

Duties of Adviser .

          The Adviser, at its own expense, shall furnish the following services and facilities to the Fund:

 

          (a)           Investment Program . The Adviser shall (i) furnish continuously an investment program for the Fund, (ii) determine (subject to the overall supervision and review of the Trust’s Board of Trustees) the investments to be purchased, held, sold or exchanged by the Fund and the portion, if any, of the assets of the Fund to be held uninvested, (iii) make changes in the investments of the Fund and (iv) vote, exercise consents and exercise all other rights pertaining to such investments.  The Adviser also shall manage, supervise and conduct the other affairs and business of the Fund and matters incidental thereto pursuant to a separate administration agreement with the Trust, subject always to the control of the Trust’s Board of Trustees, and to the provisions of the organizational documents of the Trust, the Registration Statement of the Trust with respect to the Fund and its shares of beneficial interest (“ Shares ”), including the Fund’s Prospectus and Statement of Additional Information, and the 1940 Act, in each case as from time to time amended and in effect.  Subject to the foregoing, the Adviser shall have the authority to engage one or more sub-advisers in connection with the portfolio management of the Fund, which sub-advisers may be affiliates of the Adviser; provided, however, that the Adviser shall remain responsible to the Trust with respect to its duties and obligations on behalf of the Fund set forth in this Agreement.


 

          (b)           Portfolio Transactions .  The Adviser shall place all orders for the purchase and sale of portfolio securities for the account of the Fund with brokers or dealers selected by the Adviser, although the Fund will pay the actual brokerage commissions on portfolio transactions in accordance with Section 3(d) .

          In placing portfolio transactions for the Fund, it is recognized that the Adviser will give primary consideration to securing the most favorable price and efficient execution.  Consistent with this policy, the Adviser may consider the financial responsibility, research and investment information and other services provided by brokers or dealers who may effect or be a party to any such transaction or other transactions to which other clients of the Adviser may be a party.  It is understood that neither the Fund nor the Adviser has adopted a formula for allocation of the Fund’s investment transaction business.  It is also understood that it is desirable for the Fund that the Adviser have access to supplemental investment and market research and security and economic analysis provided by brokers who may execute brokerage transactions at a higher cost to the Fund than would otherwise result when allocating brokerage transactions to other brokers on the basis of seeking the most favorable price and efficient execution.  Therefore, the Adviser is authorized to place orders for the purchase and sale of securities for the Fund with such brokers, subject to review by the Trust’s Board of Trustees from time to time with respect to the extent and continuation of this practice.  It is understood that the services provided by such brokers may be useful or beneficial to the Adviser in connection with its services to other clients.

          On occasions when the Adviser deems the purchase or sale of a security to be in the best interest of the Fund as well as other clients, the Adviser, to the extent permitted by applicable laws and regulations, may, but shall be under no obligation to, aggregate the securities to be so sold or purchased in order to obtain the most favorable price or lower brokerage commissions and efficient execution.  In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Adviser in the manner it considers to be the most equitable and consistent with its fiduciary obligations to the Fund and to such other clients.

 

SECTION 3.

Allocation of Expenses .

 

 

          Except for the services and facilities to be provided by the Adviser pursuant to a separate administration agreement with the Trust, the Fund assumes and shall pay all expenses for all other Fund operations and activities and shall reimburse the Adviser for any such expenses incurred by the Adviser.  Unless the Prospectus or Statement of Additional Information of the Fund provides otherwise, the expenses to be borne by the Fund shall include, without limitation:

 

 

 

          (a)          all expenses of organizing the Fund;

 

 

 

          (b)          the charges and expenses of any registrar, stock transfer or dividend disbursing agent, shareholder servicing agent, custodian or depository appointed by the Fund for the safekeeping of its cash, portfolio securities and other property, including the costs of servicing shareholder investment accounts, and bookkeeping, accounting and pricing services provided to the Fund (other than those utilized by the Adviser in providing the services described in Section 2 );

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          (c)          the charges and expenses of bookkeeping, accounting and auditors;

 

 

 

          (d)          brokerage commissions and other costs incurred in connection with transactions in the portfolio securities of the Fund, including any portion of such commissions attributable to brokerage and research services as defined in Section 28(e) of the Securities Exchange Act of 1934;

 

 

 

          (e)          taxes, including issuance and transfer taxes, and trust registration, filing or other fees payable by the Fund to federal, state or other governmental agencies;

 

 

 

          (f)          expenses, including the cost of printing certificates, relating to the issuance of Shares of the Fund;

 

 

 

          (g)          expenses involved in registering and maintaining registrations of the Fund and of its Shares with the Securities and Exchange Commission (“ SEC ”) and various states and other jurisdictions, including reimbursement of actual expenses incurred by the Adviser or others in performing such functions for the Fund, and including compensation of persons who are employees of the Adviser, in proportion to the relative time spent on such matters;

 

 

 

          (h)          expenses of shareholders’ and trustees’ meetings, including meetings of committees, and of preparing, printing and mailing proxy statements, quarterly reports, if any, semi-annual reports, annual reports and other communications to existing shareholders;

 

 

 

          (i)          expenses of preparing and printing prospectuses and marketing materials;

 

 

 

          (j)          compensation and expenses of trustees who are not affiliated with the Adviser;

 

 

 

          (k)          charges and expenses of legal counsel in connection with matters relating to the Fund, including, without limitation, legal services rendered in connection with the Fund’s trust and financial structure and relations with its shareholders, issuance of Shares of the Fund and registration and qualification of Shares under federal, state and other laws;

 

 

 

          (l)          the cost and expense of maintaining the books and records of the Fund, including general ledger accounting;

 

 

 

          (m)          insurance premiums on fidelity, errors and omissions and other coverages, including the expense of obtaining and maintaining a fidelity bond as required by Section 17(g) of the 1940 Act which may also cover the Adviser;

 

 

 

          (n)          expenses incurred in obtaining and maintaining any surety bond or similar coverage with respect to securities of the Fund;

 

 

 

          (o)          interest payable on Fund borrowings;

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          (p)          such other non-recurring expenses of the Fund as may arise, including expenses of actions, suits or proceedings to which the Trust on behalf of the Fund is a party and expenses resulting from the legal obligation that the Trust on behalf of the Fund may have to provide indemnity with respect thereto;

 

 

 

          (q)          expenses and fees reasonably incidental to any of the foregoing specifically identified expenses; and

 

 

 

          (r)          all other expenses permitted by the Prospectus and Statement of Additional Information of the Fund as being paid by the Fund.


 

SECTION 4.

Advisory Fee .

          In return for its advisory services, the Fund will pay the Adviser a monthly fee, computed and accrued daily, based on an annual rate of 2.25% of the Fund’s “Average Daily Managed Assets.”  “Average Daily Managed Assets” of the Trust shall mean the average daily value of the total assets of the Trust, less all accrued liabilities of the Trust (other than the aggregate amount of any outstanding borrowings constituting financial leverage).  The Adviser may waive a portion of its fees.  If this Agreement becomes effective subsequent to the first day of a month or shall terminate before the last day of a month, compensation for such month shall be computed in a manner consistent with the calculation of the fees payable on a monthly basis.  Subject to the provisions of Section 5 below, the accrued fees will be payable monthly as promptly as possible after the end of each month during which this Agreement is in effect. 

 

SECTION 5.

Reimbursements .

          The parties agree that they may negotiate from time to time for the Adviser to reimburse certain costs and expenses of the Fund.  If such an agreement is in effect, the determination of whether reimbursement for such costs and expenses is due the Fund from the Adviser will be made on an accrual basis once monthly, and if it is so determined that such reimbursement is due, the accrued amount of such reimbursement that is due shall serve as an offset to the investment advisory fee payable monthly by the Fund to the Adviser pursuant to Section 4 hereof, and the amount to be paid by the Adviser to the Fund as soon as is practicable at the end of a fiscal year of the Fund shall be equal to the difference between the aggregate reimbursement due the Fund from the Adviser for that fiscal year and the aggregate offsets made by the Fund against the aggregate investment advisory fees payable to the Adviser pursuant to Section 4 hereof for that fiscal year by virtue of such aggregate reimbursement.  The foregoing limitation on reimbursement of costs and expenses shall exclude distribution and service fees, brokerage commissions, short sale dividend expense, taxes, deferred organization expenses and extraordinary expenses (as determined by the Board of the Trustees of the Fund in the exercise of its business judgment).

 

SECTION 6.

Indemnification .


 

          (a)          The Trust hereby agrees to indemnify the Adviser and each of the Adviser’s partners, officers, employees, and agents (including any individual who serves at the Adviser’s request as director, officer, partner, trustee or the like of another corporation) and controlling persons (each such person being an “ Indemnitee” ) against

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any liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees (all as provided in accordance with applicable state law) reasonably incurred by such Indemnitee in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which he may be or may have been involved as a party or otherwise or with which he may be or may have been threatened, while acting in any capacity set forth above in this paragraph or thereafter by reason of his having acted in any such capacity, except with respect to any matter as to which he shall have been adjudicated not to have acted in good faith in the reasonable belief that his action was in the best interest of the Trust and furthermore, in the case of any criminal proceeding, so long as he had no reasonable cause to believe that the conduct was unlawful, provided, however, that (1) no Indemnitee shall be indemnified hereunder against any liability to the Trust or its shareholders or any expense of such Indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence (iv) reckless disregard of the duties involved in the conduct of his position (the conduct referred to in such clauses (i) through (iv) being sometimes referred to herein as “ Disabling Conduct ”), (2) as to any matter disposed of by settlement or a compromise payment by such Indemnitee, pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless there has been a determination that such settlement or compromise is in the best interests of the Trust and that such Indemnitee appears to have acted in good faith in the reasonable belief that his action was in the best interests of the Trust and did not involve Disabling Conduct by such Indemnitee and (3) with respect to any action, suit or other proceeding voluntarily prosecuted by any Indemnitee as plaintiff, indemnification shall be mandatory only if the prosecution of such action, suit or other proceeding by such Indemnitee was authorized by a majority of the full Board of the Trust.  Notwithstanding the foregoing, the Trust shall not be obligated to provide any such indemnification to the extent such provision would waive any right that the Trust cannot lawfully waive.

 

 

 

          (b)          The Trust shall make advance payments in connection with the expenses of defending any action with respect to which indemnification might be sought hereunder if the Trust receives a written affirmation of the Indemnitee’s good faith belief that the standard of conduct necessary for indemnification has been met and a written undertaking to reimburse the Trust unless it is subsequently determined that he is entitled to such indemnification and if the Trustees of the Trust determine that the facts then known to them would not preclude indemnification. In addition, at least one of the following conditions must be met: (1) the Indemnitee shall provide adequate security for his undertaking, (2) the Trust shall be insured against losses arising by reason of any lawful advances, (3) a majority of a quorum of Trustees of the Trust who are neither “interested persons” of the Trust (as defined in Section 2(a)(19) of the 1940 Act) nor parties to the proceeding (“ Disinterested Non-Party Trustees ”) or an independent legal counsel in a written opinion, shall determine, based on a review of readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that the Indemnitee ultimately will be found entitled to indemnification or (4) there is not a Disinterested Non-Party Trustee, Indemnitee provides the written affirmation referred to above.

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          (c)          All determinations with respect to indemnification hereunder shall be made (1) by a final decision on the merits by a court or other body of competent jurisdiction before whom the proceeding was brought that such Indemnitee is not liable by reason of Disabling Conduct or, (2) in the absence of such a decision, by (i) a majority vote of a quorum of the Disinterested Non-Party Trustees of the Trust, or (ii) if such a quorum is not obtainable or even if obtainable, if a majority vote of such quorum so directs, independent legal counsel in a written opinion.

 

 

 

          (d)          Each Indemnitee shall, in the performance of its duties, be fully and completely justified and protected with regard to any act or any failure to act resulting from reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel, or upon reports made to the Trust by any of the Trust’s officers or employees or by any advisor, administrator, manager, distributor, selected dealer, accountant, appraiser or other expert or consultant selected with reasonable care by the Trustees, officers or employees of the Trust, regardless of whether such counsel or other person may also be a Trustee.

 

 

 

          (e)          The rights accruing to any Indemnitee under these provisions shall not exclude any other right to which he may be lawfully entitled.


 

SECTION 7.

Relations with Fund .

Subject to and in accordance with the organizational documents of the Adviser and the Trust, as well as their policies and procedures and codes of ethics, it is understood that Trustees, officers, agents and shareholders of the Fund are or may be interested in the Adviser (or any successor thereof) as directors, officers or otherwise, that partners, officers and agents of the Adviser (or any successor thereof) are or may be interested in the Fund as Trustees, officers, agents, shareholders or otherwise, and that the Adviser (or any such successor thereof) is or may be interested in the Fund as a shareholder or otherwise.

 

SECTION 8.

Liability of Adviser .

The Adviser shall not be liable to the Fund for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the matters to which this Agreement relates; provided, however, that no provision of this Agreement shall be deemed to protect the Adviser against any liability to the Fund or its shareholders to which it might otherwise be subject by reason of any Disabling Conduct nor shall any provision hereof be deemed to protect any trustee or officer of the Fund against any such liability to which he might otherwise be subject by reason of any Disabling Conduct.

 

SECTION 9.

Duration and Termination of this Agreement .


 

          (a)           Duration .  This Agreement shall become effective on the date first set forth above, such date being the date on which this Agreement has been executed following: (1) the approval of the Trust’s Board of Trustees, including approval by a vote of a majority of the Trustees who are not “interested persons” (as defined in the 1940 Act) of the Adviser or the Fund, cast in person at a meeting called for the purpose of voting on such approval; and (2) the approval by a “vote of a majority of the outstanding voting securities” (as defined in the 1940 Act) of the Fund. 

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Unless terminated as herein provided, this Agreement shall remain in full force and effect until the date that is two years after the effective date of this Agreement.  Subsequent to such initial period of effectiveness, this Agreement shall continue in full force and effect, subject to paragraph 9(c) , so long as such continuance is approved at least annually (a) by either the Trust’s Board of Trustees or by a “vote of a majority of the outstanding voting securities” (as defined in the 1940 Act) of the Fund and (b) in either event, by the vote of a majority of the Trustees of the Fund who are not parties to this Agreement or “interested persons” (as defined in the 1940 Act) of any such party, cast in person at a meeting called for the purpose of voting on such approval.

 

 

 

          (b)           Amendment .  No provision of this Agreement may be amended, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the amendment, waiver, discharge or termination is sought.  Any amendment of this Agreement shall be subject to the 1940 Act including the interpretation thereof that amendments that do not increase the compensation of the Adviser or otherwise fundamentally alter the relationship of the Trust with the Adviser do not require shareholder approval if approved by the requisite majority of the Trust’s Trustees who are not “interested persons” (as defined in the 1940 Act) of the Trust.

 

 

 

          (c)           Termination .  This Agreement may be terminated at any time, without payment of any penalty, by vote of the Trust’s Board of Trustees, or by a “vote of a majority of the outstanding voting securities” (as defined in the 1940 Act) of the Fund, or by the Adviser, in each case on not more than 60 days’ nor less than 30 days’ prior written notice to the other party.

 

 

 

          (d)           Automatic Termination .  This Agreement shall automatically and immediately terminate in the event of its “assignment” (as defined in the 1940 Act).


 

SECTION 10.

Services Not Exclusive .

          The services of the Adviser to the Fund hereunder are not to be deemed exclusive, and the Adviser (and its affiliates) shall be free to render similar services to others so long as its services hereunder are not impaired thereby; provided, however, that the Adviser will undertake no activities that, in its reasonable good faith judgment, will adversely affect the performance of its obligations under this Agreement.  In addition, the parties may enter into other agreements pursuant to which the Adviser provides administrative or other, non-investment advisory services to the Fund, and the Adviser may be compensated for such other services.

 

SECTION 11.

Notices .

          Notices under this Agreement shall be in writing and shall be addressed, and delivered or mailed postage prepaid, to the other party at such address as such other party may designate from time to time for the receipt of such notices.  Until further notice to the other party, the address of each party to this Agreement for this purpose shall be 13455 Noel Road, Suite 800, Dallas, Texas  75240.

 

SECTION 12.

Governing Law; Severability; Counterparts .

          This Agreement shall be construed in accordance with the laws of the State of Delaware, and the applicable provisions of the 1940 Act.  To the extent that applicable law of the State of

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Delaware, or any of the provisions herein, conflict with applicable provisions of the 1940 Act, the latter shall control.  If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.  This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument.

 

SECTION 13.

Miscellaneous .

          The Adviser agrees to advise the Fund of any change of its membership (which shall mean its general partner) within a reasonable time after such change.  If the Adviser enters into a definitive agreement that would result in a change of control (within the meaning of the 1940 Act) of the Adviser, it agrees to give the Fund the lesser of 60 days’ written notice and such notice as is reasonably practicable before consummating the transaction.

          Where the effect of a requirement of the 1940 Act reflected in or contemplated by any provisions of this Agreement is altered by a rule, regulation or order of the SEC, whether of special or general application, such provision shall be deemed to incorporate the effect of such rule, regulation or order.

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          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first set forth above.

 

HIGHLAND CAPITAL MANAGEMENT, L.P.

 

 

 

 

By: 

STRAND ADVISORS, INC.,

 

 

its general partner

 

 

 

 

 

 

 

By: 

 

 

 

 

 

Name:

 

 

Title:

 

 

 

 

 

 

 

HIGHLAND FUNDS I

 

on behalf of its series,

 

Highland Equity Opportunities Fund

 

 

 

 

By: 

 

 

 

 

 

Name:

 

 

Title:

 

INVESTMENT SUB-ADVISORY AGREEMENT

          AGREEMENT dated as of __________, 2006, by and among Highland Funds I, a Delaware statutory trust (the “ Trust ”), on behalf of its series, Highland Equity Opportunities Fund (the “ Fund ”); Highland Capital Management, L.P., a Delaware limited partnership (the “ Adviser ”); and Prospect Management Advisers, L.P., a Delaware limited partnership (the “ Sub-Adviser ”), a wholly-owned subsidiary of the Adviser.

          WHEREAS, the Adviser has agreed to furnish investment advisory services to the Trust, an open-end management investment company registered under the Investment Company Act of 1940, as amended (the “ 1940 Act ”);

          WHEREAS, the Adviser wishes to retain the Sub-Adviser to provide certain sub-advisory services as described below in connection with Adviser’s advisory activities on behalf of the Fund;

          WHEREAS, the investment advisory agreement between the Adviser and the Trust on behalf of the Fund dated __________, 2006 (such agreement or any successor agreement between such parties relating to investment advisory services on behalf of the Fund is referred to herein as the “ Advisory Agreement ”) contemplates that the Adviser may sub-contract investment advisory services with respect to the Fund to one or more sub-advisers pursuant to sub-advisory agreements agreeable to the Trust and approved in accordance with the provisions of the 1940 Act applicable thereto; and

          WHEREAS, this Agreement has been approved by the Trust’s Board of Trustees and the sole initial shareholder of the Fund in accordance with the provisions of the 1940 Act, and the Sub-Adviser is willing to furnish such services upon the terms and conditions herein set forth;

          NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, it is agreed by and between the parties hereto as follows:

          1.           Appointment of Sub-Adviser .  The Adviser hereby appoints the Sub-Adviser to act as sub-adviser with respect to the Fund, and the Sub-Adviser accepts such appointment and agrees to render the services herein set forth for the compensation herein provided.


          2.           Services of Sub-Adviser .            

                       (a)          Subject to the succeeding provisions of this Agreement, the oversight and supervision of the Adviser, the Sub-Adviser will perform the day-to-day operations of the Fund which may include one or more of the following services at the request of the Adviser:  (i) acting as investment adviser for and managing the investment and reinvestment of those assets of the Fund as the Adviser may from time to time request and in connection therewith have discretion in purchasing and selling assets for the Fund in accordance with the terms hereof; (ii) arranging for the purchase and sale of assets held in the investment portfolio of the Fund; (iii) providing investment research and credit analysis concerning the Fund’s investments;  (iv) placing orders for all purchases and sales of such investments made for the Fund, (v) voting, exercising consents and exercising all other rights pertaining to such assets, and (vi) maintaining those books and records with respect to the Fund’s portfolio transactions as are required by subparagraphs (b)(5) through (b)(11) of Rule 31a-1 (as modified, amended or reclassified from time to time) under the 1940 Act and the rules and regulations of the Securities and Exchange Commission (the “ SEC ”) promulgated under the 1940 Act (the “ 1940 Act Rules ”). 

                       (b)          The Sub-Adviser will keep the Trust and Adviser informed of developments materially affecting the Fund and shall, on its own initiative, furnish to the Trust from time to time whatever information the Sub-Adviser believes appropriate for this purpose. 

                       (c)          The Sub-Adviser will periodically communicate to the Adviser, at such times as the Adviser may direct, information concerning the purchase and sale of assets for the Fund, including:  (i) the name of the issuer, (ii) the amount of the purchase or sale, (iii) the name of the broker or dealer, if any, through which the purchase or sale is effected, (iv) the CUSIP number of the instrument, if any, and (v) such other information as the Adviser may reasonably require for purposes of the Adviser’s fulfilling its obligations to the Trust under its agreements with the Trust and the Trust’s fulfilling its obligations under the 1940 Act, the 1940 Act Rules and various policies and procedures adopted by the Trust and communicated to the Sub-Adviser by the Trust.

          3.           Covenants of the Sub-Adviser .  In the performance of its duties under this Agreement, the Sub-Adviser covenants to the Adviser and the Trust that it shall:

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                       (a)          at all times conform to, and act in accordance with, any requirements imposed by: (i) the provisions of the 1940 Act, the 1940 Act Rules and the Investment Advisers Act of 1940, as amended (the “ Advisers Act ”), and all applicable Rules and Regulations of the SEC promulgated thereunder (the “ Advisers Act Rules ”); (ii) any other applicable provision of law; (iii) the provisions of the Agreement and Declaration of Trust and the By-Laws of the Trust, as such documents are amended from time to time (upon notification of such amendment); (iv) the investment objectives, policies and restrictions of the Fund (as currently in effect and as they may be amended or supplemented from time to time) as stated in the Fund’s Prospectus and Statement of Additional Information and the resolutions of the Trust’s Board of Trustees (upon notification of such amendment or supplement); and (v) any policies and determinations of the Trust’s Board of Trustees (upon notification of such policy or determination).  The Trust agrees to provide written copies to the Sub-Adviser of documents (and any amendments thereto)  referred to in Section 3(a)(iii) to (a)(v) above;

                       (b)          keep the Adviser fully informed as to the composition of the Fund’s assets under the Sub-Adviser’s management;

                       (c)          performing its duties hereunder so that the Fund meets the income and asset diversification requirements of Section 851 of the Internal Revenue Code of 1986, as amended (the “ Code ”);

                       (d)          place orders for the purchase or sale of assets by the Trust either directly with the issuer or with any broker or dealer.  In placing orders with brokers and dealers, the Sub-Adviser will give primary consideration to securing the most favorable price and efficient execution.   Consistent with this policy, the Sub-Adviser may consider the financial responsibility, research and investment information and other services provided by brokers or dealers who may effect or be a party to any such transaction or other transactions to which other clients of the Sub-Adviser may be a party.  It is understood that neither the Adviser nor the Sub-Adviser has adopted a formula for allocation of the Fund’s investment transaction business.  It is also understood that it is desirable for the Fund that the Sub-Adviser have access to supplemental investment and market research and security and economic analysis provided by brokers who may execute brokerage transactions at a higher cost to the Fund than would otherwise result when allocating brokerage transactions to other brokers on the basis of seeking the most favorable price and efficient execution.  Therefore, the Sub-Adviser is authorized to place orders for the purchase and sale of securities for the Fund with such brokers, subject to review by the

3


Adviser and the Trust’s Board of Trustees from time to time with respect to the extent and continuation of this practice.  It is understood that the services provided by such brokers may be useful or beneficial to the Adviser in connection with its services to other clients.

          On occasions when the Sub-Adviser deems the purchase or sale of a security to be in the best interest of the Fund as well as other clients, the Sub-Adviser, to the extent permitted by applicable laws and regulations, may, but shall be under no obligation to, aggregate the securities to be so sold or purchased in order to obtain the most favorable price or lower brokerage commissions and efficient execution.  In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Sub-Adviser in the manner it considers to be the most equitable and consistent with its fiduciary obligations to clients;

                       (e)          vote all proxies solicited by or with respect to the issuers of securities in which assets of the Fund allocated to Sub-Adviser are invested consistent with the Sub-Adviser’s proxy voting guidelines as approved by the Trust’s Board of Trustees based upon the best interests of the Fund.  The Sub-Adviser will maintain appropriate records detailing its voting of proxies on behalf of the Fund and (i) will provide to the Adviser at least quarterly (and more often to the extent required by applicable law) a report setting forth the proposals since the prior report on which the Fund’s assets over which the Sub-Adviser had voting power were entitled to vote and the manner in which the Sub-Adviser exercised such vo ting power, including the name of the corresponding issuers, and (ii) will comply with the 1940 Act and the 1940 Act Rules with respect to voting of proxies by the Fund;

                       (f)          if requested by the Adviser, provide the Adviser, no later than the 45th day following the end of each of the Fund’s semi-annual fiscal period and fiscal year, with a letter to shareholders (to be subject to review, approval  and editing by the Adviser and, if so determined, incorporated into any report by the Adviser);

                       (g)          provide reports to the Trust’s Board of Trustees for consideration at meetings of the Trust’s Board on the Sub-Adviser’s investment program for the Fund and the issuers and securities represented in the Fund’s portfolio managed by the Sub-Adviser and furnish the Adviser or the Trust’s Board of Trustees with such periodic and special reports and attend such meetings as the Trustees or the Adviser may reasonably request;

4


                       (h)          cooperate with the Fund’s independent public accountants and take all reasonable action in the performance of services and obligations under this Agreement to assure that the information needed by such accountants and that is not otherwise available from the Fund or its agents is made available to them for the expression of their opinion without any qualification as to the scope of their examination, including, but not limited to, their opinion included in the Trust’s or the Fund’s annual report under the 1940 Act;

                       (i)          promptly notify the Adviser of (i) any financial or other condition that will or is likely to impair the Sub-Adviser’s ability to fulfill its commitment under this Agreement, and (ii) any reduction, non-renewal or restrictive modification to the Sub-Adviser’s fidelity bond, errors and omissions or other similar insurance policies and any claims or payments thereunder;

                       (j)        use reasonable compliance techniques as the Adviser or the Board of Trustees of the Trust may adopt, including any written compliance procedures;

                       (k)        maintain disclosure controls and procedures reasonably designed to ensure that any information provided to the Trust for inclusion in any filings made with the SEC on behalf of the Fund or delivered to shareholders of the Fund is materially accurate and complete and otherwise complies with applicable disclosure requirements;

                       (l)        furnish to the Adviser any information in the possession of the Sub-Adviser that is required to be filed by the Adviser or the Trust with the SEC or sent to shareholders under the 1940 Act, the 1940 Act Rules, the Advisers Act or the Advisers Act Rules or any exemptive or other relief that the Adviser or the Trust obtains from the SEC;

                       (m)        immediately notify the Adviser of any inquiry or proceeding by any regulatory or self regulatory body or any judicial or arbitration proceeding by any person relating to the Sub-Adviser or its affiliates that may adversely affect the ability of the Sub-Adviser, or its relevant employees, to provide services in accordance with the terms hereof or that relate to the Fund or the Sub-Adviser;

5


                       (n)        immediately notify the Adviser as to any change in the portfolio manager, team or committee for the Fund;

                       (o)        notify the Adviser within a reasonable time following any material change in ownership of Sub-Adviser or any other significant changes to its management structure or executive personnel; and

                       (p)        notify the Adviser of any potential conflicts of interest of the Sub-Adviser in connection with its performance of its duties under this Agreement.

          4.           Covenants of the Adviser .  In the performance of its duties under this Agreement, the Adviser covenants to the Sub-Adviser that it shall:

                       (a)          keep the Sub-Adviser fully advised of the Fund’s investment objectives and any modifications and changes thereto, as well as any specific investment restrictions or limitations by sending the Sub-Adviser copies of the Trust’s registration statement and all amendments thereto under the 1940 Act, and all pre-effective and post-effective amendments thereto under the Securities Act of 1933, pertaining to the Fund;

                       (b)          furnish the Sub-Adviser with a copy of any financial statement or report prepared for the Fund by its independent public accountants and with copies of any financial statements or reports made by the Fund to shareholders or to any governmental body and to inform the Sub-Adviser of the results of any audits or examinations by regulatory authorities pertaining to the Fund; and

                       (c)          furnish the Sub-Adviser with any further materials or information that the Sub-Adviser may reasonably request to enable it to perform its functions under this Agreement.

          5.           Services Not Exclusive .  The services of the Sub-Adviser to the Fund are not to be deemed exclusive, and the Sub-Adviser shall be free to render similar services to others so long as its services hereunder are not impaired thereby; provided, however, that the Sub-Adviser will undertake no activities that, in its reasonable good faith judgment, will adversely affect the performance of its obligations under this Agreement.

6


          6.           Disclosure about Sub-Adviser .  The Sub-Adviser has reviewed the Registration Statement for the Trust in the form declared effective by the SEC that contains disclosure about the Sub-Adviser, and represents and warrants that, with respect to the disclosure about the Sub-Adviser or information describing the Sub-Adviser and provided by or approved in writing by the Sub-Adviser, such Registration Statement contains, as of the date of such Registration Statement and the date hereof, no untrue statement of any material fact and does not omit any statement of material fact that was required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading.  If at any time such disclosure or information becomes inaccurate in any material respect, the Sub-Adviser will promptly provide corrective disclosure to the Adviser and the Trust.  The Sub-Adviser further represents and warrants that it is a duly registered investment adviser under the Advisers Act and will maintain such registration so long as this Agreement remains in effect.  The Sub-Adviser will provide or offer to provide the Adviser and the Trust with a copy of the Sub-Adviser’s Form ADV, from time to time if and when it is amended.

          7.           Books and Records .  In compliance with the requirements of Rule 31a-3 under the 1940 Act, the Sub-Adviser hereby agrees that all records that  it maintains with respect to the Fund are the property of the Trust and further agrees to surrender promptly to the Trust any such records upon the Trust’s request; provided that the Sub-Adviser may retain copies of such records.  The Sub-Adviser further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1 under the 1940 Act (to the extent such books and records are not maintained by the Adviser or the Trust’s custodian, its transfer agent or shareholder servicing agent).

          8.           Agency Cross Transactions .  From time to time, the Sub-Adviser or brokers or dealers affiliated with it may find themselves in a position to buy for certain of their brokerage clients (each an “ Account ”) securities that the Sub-Adviser’s investment advisory clients wish to sell, and to sell for certain of their brokerage clients securities which advisory clients wish to buy.  Where one of the parties is an advisory client, the Sub-Adviser or the affiliated broker or dealer cannot participate in this type of transaction (known as an agency cross transaction) on behalf of an advisory client and retain commissions from both parties to the transaction without the advisory client’s consent.  By execution of this Agreement, the Trust authorizes the Sub-Adviser or its affiliates to participate in agency cross transactions involving an Account on the one hand, and the Trust or the other.  The Sub-Adviser will provide the Adviser and the Trust with all

7


information about such transactions requested by either of them from time to time.  The Trust may revoke its consent at any time by written notice to the Sub-Adviser.

          9.           Expenses .  During the term of this Agreement, the Sub-Adviser will bear all costs and expenses of its employees and any overhead incurred by the Sub-Adviser in connection with its duties hereunder.

          10.         Compensation .  The Adviser agrees to pay to the Sub-Adviser and the Sub-Adviser agrees to accept as full compensation for all services rendered by the Sub-Adviser as such, a fee that will consist of two components:  (1) a base fee of 1.00% of the Fund’s average daily net assets during the previous month  (“ Base Fee ”), plus or minus (2) a performance-fee adjustment (“ Performance Adjustment ”) calculated monthly by applying a variable rate of up to a maximum of 0.15% (positive or negative) to the Fund’s average daily net assets during the applicable performance measurement period.  The performance measurement period generally will be a rolling 18-month period, although no Performance Adjustment will be made until the Fund has been operational for at least 12 months, and accordingly, only the Base Fee rate will apply for the initial 12 months.  Once the Fund has been operational for at least 12 months, but less than 18 months, the performance measurement period will be equal to the time that has elapsed since the Fund’s commencement of operations.

          The Performance Adjustment may result in an increase or decrease in the sub-advisory fee paid by the Adviser, depending upon the investment performance of the Fund relative to its benchmark index, the S&P 500 Index (the “ Index ”), over the performance measurement period.  No Performance Adjustment will be applied unless the difference between the Fund’s investment performance and the investment record of the S&P 500 Index is 1.00% or greater (positive or negative) during the applicable performance measurement period.  If during the applicable performance measurement period the Fund’s investment performance were:

 

(i)

at least 1.00% (but less than 2.50%) greater (positive or negative) than the investment record of the Index, then the Performance Adjustment would be 0.05% (positive or negative, respectively);

 

 

 

 

(ii)

at least 2.50% (but less than 4.50%) greater (positive or negative) than the investment record of  the Index, then the Performance

8


 

 

Adjustment would be 0.10% (positive or negative, respectively); or

 

 

 

 

(iii)

at least 4.50% greater (positive or negative) than the investment record of the Index, then the Performance Adjustment would be 0.15% (positive or negative, respectively).

          Performance of the Fund is calculated net of expenses; whereas, the S&P 500 Index does not have any fees or expenses.  Reinvestments of dividends and distributions are included in calculating both the performance of the Fund and the S&P 500 Index.

          The investment performance of Class Z Shares will be used for purposes of calculating the Fund’s Performance Adjustment.  After the Adviser determines whether the Fund’s performance was above or below the S&P 500 Index by comparing the investment performance of the Class Z Shares against the investment record of the S&P 500 Index, the Adviser will apply the same Performance Adjustment (positive or negative) across each other class of shares of the Fund.

          11.           Indemnification .

                       (a)          Subject to Section 11(c) , the Trust agrees to indemnify the Sub-Adviser and each of the Sub-Adviser’s partners, officers, employees, agents, associates and controlling persons and the directors, partners, members, officers, employees and agents thereof (including any individual who serves at the Sub-Adviser’s request as director, officer, partner, member, trustee or the like of another entity) (each such person being a “ Sub-Adviser Indemnitee ”) against any liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees (all as provided in accordance with applicable state law) reasonably incurred by such Sub-Adviser Indemnitee in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which such Sub-Adviser Indemnitee may be or may have been involved as a party or otherwise or with which such Sub-Adviser Indemnitee may be or may have been threatened, as a result of acting in any capacity set forth herein and by reason of such Sub-Adviser Indemnitee having acted in any such capacity, except with respect to any matter as to which such Sub-Adviser Indemnitee shall have been adjudicated not to have acted in good faith in the reasonable belief that such Sub-Adviser Indemnitee’s action was in the best interest of the Trust and furthermore, in the case of any criminal proceeding, so long

9


as such Sub-Adviser Indemnitee had no reasonable cause to believe that the conduct was unlawful; provided, however, that (1) no Sub-Adviser Indemnitee shall be indemnified hereunder against any liability to the Adviser or the Trust or any expense of such Sub-Adviser Indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence or (iv) reckless disregard of the duties involved in the conduct of his position (the conduct referred to in such clauses (i) through (iv) being sometimes referred to herein as “ Disabling Conduct ”), (2) as to any matter disposed of by settlement or a compromise payment by such Sub-Adviser Indemnitee, pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless there has been a determination that such settlement or compromise is in the best interests of the Trust and that such Sub-Adviser Indemnitee appears to have acted in good faith in the reasonable belief that such Sub-Adviser Indemnitee’s action was in the best interests of the Trust and did not involve Disabling Conduct by such Sub-Adviser Indemnitee and (3) with respect to any action, suit or other proceeding voluntarily prosecuted by any Sub-Adv iser Indemnitee as plaintiff, indemnification shall be mandatory only if the prosecution of such action, suit or other proceeding by such Sub-Adviser Indemnitee was authorized by a majority of the full Board of Trustees of the Trust.  Notwithstanding the foregoing, the Trust shall not be obligated to provide any such indemnification to the extent such provision would waive any right that the Trust cannot fully wave.

                       (b)           Subject to Section 11(d) and notwithstanding Section 12 of this Agreement, the Sub-Adviser agrees to indemnify and hold harmless the Trust and the Adviser and each of the Trust’s and Adviser’s trustees, partners, officers, employees, agents, associates and controlling persons and the directors, partners, members, officers, employees and agents thereof (including any individual who serves at the Trust’s or Adviser’s request as director, officer, partner, member, trustee or the like of another entity) (each such person being a “ Trust/Adviser Indemnitee ”) against any liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees (all as provided in accordance with applicable state law) reasonably incurred by such Trust/Adviser Indemnitee in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which such Trust/Adviser Indemnitee may be or may have been involved as a party or otherwise or with which such Trust/Adviser Indemnitee may be or may have been threatened, as a result of acting in any capacity set forth herein and by reason of such Trust/Adviser Indemnitee having acted in any such capacity, except with respect to any matter as to which such Trust/Adviser Indemnitee shall have been adjudicated not to have acted in good faith in the reasonable belief that such Trust/Adviser

10


Indemnitee’s action was in the best interests of the Trust and furthermore, in the case of any criminal proceeding, so long as such Trust/Adviser Indemnitee had no reasonable cause to believe that the conduct was unlawful; provided, however, that (1) no Trust/Adviser Indemnitee shall be indemnified hereunder against any liability to the Sub-Adviser or any expense of such Trust/Adviser Indemnitee arising by reason of Disabling Conduct, (2) as to any matter disposed of by settlement or a compromise payment by such Trust/Adviser Indemnitee, pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless there has been a determination that such settlement or compromise is in the best interests of the Trust and that such Trust/Adviser Indemnitee appears to have acted in good faith in the reasonable belief that such Trust/Adviser Indemnitee’s action was in the best interests of the Trust and did not involve Disabling Conduct by such Trust/Adviser Indemnitee and (3) with respect to any action, suit or other proceeding voluntarily prosecuted by any Trust/Adviser Indemnitee as plaintiff, indemnification shall be mandatory only if the prosecution of such action, suit or other proceeding by such Trust/Adviser Indemnitee was authorized by the Sub-Adviser.

                       (c)          The Trust shall not be liable under Section 11(a) with respect to any claim made against a Sub-Adviser Indemnitee unless such Sub-Adviser Indemnitee shall have notified the Adviser in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Sub-Adviser Indemnitee (or after such Sub-Adviser Indemnitee shall have received notice of such service on any designated agent), but failure to notify the Trust of any such claim shall not relieve the Trust from any liability that it may have to the Sub-Adviser Indemnitee against whom such action is brought except to the extent the Trust is prejudiced by the failure or delay in giving such notice.  In case any such action is brought against the Sub-Adviser Indemnitee, the Trust will be entitled to participate, at its own expense, in the defense thereof or, after notice to the Sub-Adviser Indemnitee, to assume the defense thereof, with counsel satisfactory to the Sub-Adviser Indemnitee.  If the Trust assumes the defense of any such action and the selection of counsel by the Trust to represent the Trust and the Sub-Adviser Indemnitee would result in a conflict of interest and therefore, would not, in the reasonable judgment of the Sub-Adviser Indemnitee, adequately represent the interests of the Sub-Adviser Indemnitee, the Trust will, at its own expense, assume the defense with counsel to the Trust and, also at its own expense, with separate counsel to the Sub-Adviser Indemnitee, which counsel shall be satisfactory to the Trust and to the Sub-Adviser Indemnitee.  The Sub-Adviser Indemnitee shall bear the fees and expenses of any additional counsel retained by it, and the Trust shall not be liable to

11


the Sub-Adviser Indemnitee under this Agreement for any legal or other expenses subsequently incurred by the Sub-Adviser Indemnitee independently in connection with the defense thereof other than reasonable costs of investigation.  The Adviser shall not have the right to compromise on or settle the claim without the prior written consent of the Sub-Adviser Indemnitee if the compromise or settlement results, or may result in, a finding of wrongdoing on the part of the Sub-Adviser Indemnitee.

                       (d)          The Sub-Adviser shall not be liable under Section 11(b) with respect to any claim made against a Trust/Adviser Indemnitee unless such Adviser Indemnitee shall have notified the Sub-Adviser in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Trust/Adviser Indemnitee (or after such Trust/Adviser Indemnitee shall have received notice of such service on any designated agent), but failure to notify the Sub-Adviser of any such claim shall not relieve the Sub-Adviser from any liability that it may have to the Trust/Adviser Indemnitee against whom such action is brought except to the extent the Sub-Adviser is prejudiced by the failure or delay in giving such notice.  In case any such action is brought against the Trust/Adviser Indemnitee, the Sub-Adviser will be entitled to participate, at its own expense, in the defense thereof or, after notice to the Sub/Adviser Indemnitee, to assume the defense thereof, with counsel satisfactory to the Adviser Indemnitee.  If the Sub-Adviser assumes the defense of any such action and the selection of counsel by the Sub-Adviser to represent both the Sub-Adviser and the Trust/Adviser Indemnitee would result in a conflict of interest and therefore, would not, in the reasonable judgment of the Trust/Adviser Indemnitee, adequately represent the interests of the Trust/Adviser Indemnitee, the Sub-Adviser will, at its own expense, assume the defense with counsel to the Sub-Adviser and, also at its own expense, with separate counsel to the Trust/Adviser Indemnitee, which counsel shall be satisfactory to the Sub-Adviser and to the Trust/Adviser Indemnitee.  The Trust/Adviser Indemnitee shall bear the fees and expenses of any additional counsel retained by it, and the Sub-Adviser shall not be liable to the Trust/Adviser Indemnitee under this Agreement for any legal or other expenses subsequently incurred by the Trust/Adviser Indemnitee independently in connection with the defense thereof other than reasonable costs of investigation.  The Sub-Adviser shall not have the right to compromise on or settle the claim without the prior written consent of the Trust/Adviser Indemnitee if the compromise or settlement results, or may result in a finding of wrongdoing on the part of the Trust/Adviser Indemnitee.

                       (e)          Each Sub-Adviser Indemnitee shall, in the performance of its duties, be fully and completely justified and protected with regard to any act or any

12


failure to act resulting from reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel, or upon reports made to the Trust by any of the Trust’s officers or employees or by any advisor, administrator, manager, distributor, selected dealer, accountant, appraiser or other expert or consultant selected with reasonable care by the Trustees, officers or employees of the Trust, regardless or whether such counsel or other person may also be a Trustee.

          12.         Limitation on Liability .  The Sub-Adviser will not be liable for any error of judgment or mistake of law or for any loss suffered by the Adviser or by the Trust in connection with the performance of this Agreement, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services or a loss resulting from Disabling Conduct.

          13.         Duration and Termination .  This Agreement shall become effective as of the date hereof and, unless sooner terminated with respect to the Trust as provided herein, shall continue in effect for a period of two years.  Thereafter, if not terminated, this Agreement shall continue in effect with respect to the Trust in accordance with the applicable requirements of the 1940 Act and the 1940 Act Rules.  Notwithstanding the foregoing, this Agreement may be terminated by the Trust or the Adviser at any time, without the payment of any penalty, upon giving the Sub-Adviser 60 days’ written notice (which notice may be waived by the Sub-Adviser), provided that such termination by the Trust or the Adviser shall be directed or approved by the vote of a majority of the Trustees of the Trust in office at the time or by the “vote of a majority of the outstanding voting securities” (as defined in the 1940 Act) of the Fund, or by the Sub-Adviser on 60 days’ written notice (which notice may be waived by the Trust and the Adviser), and will terminate automatically upon any termination of the Investment Advisory Agreement between the Trust (on behalf of the Fund) and the Adviser.  This Agreement will also immediately terminate in the event of its “assignment” (as defined in the 1940 Act and the 1940 Act Rules; provided however, that no transfer may be made by the Sub-Adviser under Rule 2a-6 of the 1940 Act without the approval of a majority of the Trust’s Board of Trustees who are not “interested persons” of the Trust).

          14.         Confidential Relationship .  Information furnished by the Trust or by one party to another relating to the Trust is confidential and shall not be disclosed to third parties unless required by law or unless the Trust otherwise consents.  Adviser and Sub-Adviser, on behalf of themselves and their affiliates and representatives, agree to keep

13


confidential all records and other information relating to the other party (as the case may be), except after prior notification to and approval in writing by Adviser or the Sub-Adviser (as the case may be), which approval shall not be unreasonably withheld, and may not be withheld, where the Adviser or the Sub-Adviser or any affiliate would be exposed to civil or criminal contempt proceedings for failure to comply or when requested to divulge such information by duly constituted authorities.  Without limiting the generality of the foregoing, the Sub-Adviser shall not take any action that shall result in a violation or breach of the Trust’s Privacy Policy as in effect from time to time and provided to the Sub-Adviser by the Trust.

          15.         Notices .  Any notice under this Agreement shall be in writing to the other party at such address as the other party may designate from time to time for the receipt of such notice and shall be deemed to be received on the earlier of the date actually received or on the fourth day after the postmark if such notice is mailed first class postage prepaid.

          16.         Amendment of this Agreement .  No provision of this Agreement may be amended, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the amendment, waiver, discharge or termination is sought.  Any amendment of this Agreement shall be subject to approval by a majority of the Trust’s Board of Trustees, including a majority of the Trust’s Board of Trustees who are not interested persons of the Trust, and to approval by shareholders of the Fund if required by the 1940 Act and the 1940 Act Rules and not excepted by exemptive order of the SEC.

          17.         Miscellaneous .  The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.  If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.  This Agreement shall be binding on, and shall inure to the benefit of the parties hereto and their respective successors.

          18.         Governing Law; Severability; Counterparts .  This Agreement shall be construed in accordance with the laws of the State of Delaware, and the applicable provisions of the 1940 Act.  To the extent that applicable law of the State of Delaware, or any of the provisions herein, conflict with applicable provisions of the 1940 Act, the latter shall control.  If any provision of this Agreement shall be held or made invalid by a court

14


decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.  This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument.

          19.         Entire Agreement .  This Agreement embodies the entire agreement and understanding between the parties hereto, and supersedes all prior agreements and understandings relating to this Agreement’s subject matter.

          Where the effect of a requirement of the 1940 Act reflected in or contemplated by any provision of this Agreement is altered by a rule, regulation or order of the SEC, whether of special or general application, such provision shall be deemed to incorporate the effect of such rule, regulation or order.

15


          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first set forth above.

 

HIGHLAND FUNDS I

 

on behalf of its series,

 

Highland Equity Opportunities Fund

 

 

 

 

 

 

 

By:

 

 

 

 

 

Name:

 

 

Title:

 

 

 

 

 

 

 

HIGHLAND CAPITAL MANAGEMENT, L.P.

 

 

 

 

 

 

 

By:

STRAND ADVISORS, INC.,

 

 

its general partner

 

 

 

 

 

 

 

By:

 

 

 

 

 

Name:

 

 

Title:

 

 

 

 

 

 

 

PROSPECT MANAGEMENT ADVISERS, L.P.

 

 

 

 

 

 

 

By:

 

 

 

 

 

Name:

 

 

Title:

____________, 2006                    

Prospect Management Advisers, L.P.
13455 Noel Road
Suite 1300
Dallas, Texas 75240

Dear _________:

                              In consideration of our appointing you sub-adviser to the Highland Equity Opportunities Fund of Highland Funds I pursuant to the Investment Sub-Advisory Agreement of today’s date between you and us, you hereby agree to waive 0.50% of your compensation determined pursuant to Section 10 of that agreement.  This waiver agreement shall remain in effect until terminated by us, Highland Capital Management L.P.  Please indicate your agreement by signing and returning to us a copy of this letter.

 

Very truly yours,

 

 

 

 

HIGHLAND CAPITAL MANAGEMENT, L.P.

 

 

 

 

 

 

 

By:

 

 

 

 

 

James D. Dondero

 

 

President and Managing Partner

Agreed to and accepted as of _________ 2006:
PROSPECT MANAGEMENT ADVISERS, L.P.

By:

 

 

 

 

UNDERWRITING AGREEMENT

          THIS AGREEMENT is made as of                   , 2006 by and between PFPC DISTRIBUTORS, INC., a Massachusetts corporation (“PFPC Distributors”), and HIGHLAND FUNDS I, a Delaware statutory trust (the “Fund”).

W I T N E S S E T H:

          WHEREAS, the Fund is registered as an open-end, management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), and is currently offering shares of beneficial interest (such shares of all series are hereinafter called the “Shares”), representing interests in investment portfolios of the Fund identified on Exhibit A hereto (the “Portfolios”) which are registered with the Securities and Exchange Commission (the “SEC”) pursuant to the Fund’s Registration Statement on Form N-1A (the “Registration Statement”); and

          WHEREAS, the Fund wishes to retain PFPC Distributors to serve as distributor for the Portfolios to provide for the sale and distribution of the Shares of the Portfolios identified on Exhibit A and for such additional classes or series as the Fund may issue, and PFPC Distributors wishes to furnish such services.    

          NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows:   

1.

Definitions.   As used in this Agreement:

 

 

 

 

(a)

“1933 Act” means the Securities Act of 1933, as amended.

 

 

 

 

(b)

“1934 Act” means the Securities Exchange Act of 1934, as amended.

 

 

 

 

(c)

“Authorized Person” means any officer of the Fund and any other person duly authorized by the Fund’s Board of Directors or Trustees to give Oral Instructions


 

 

and Written Instructions on behalf of the Fund.  An Authorized Person’s scope of authority may be limited by setting forth such limitation in a written document signed by both parties hereto.

 

 

 

 

(d)

“NASD” means the National Association of Securities Dealers, Inc.

 

 

 

 

(e)

“Oral Instructions” mean oral instructions received by PFPC Distributors from an Authorized Person or from a person reasonably believed by PFPC Distributors to be an Authorized Person.

 

 

 

 

(f)

“Registration Statement” means any Registration Statement and any Prospectus and any Statement of Additional Information relating to the Fund filed with the SEC and any amendments or supplements thereto at any time filed with the SEC.

 

 

 

 

(g)

“Securities Laws” mean the 1933 Act, the 1934 Act, and the 1940 Act.

 

 

 

 

(h)

“Written Instructions” mean (i) written instructions signed by an Authorized Person and received by PFPC Distributors or (ii) trade instructions transmitted (and received by PFPC Distributors) by means of an electronic transaction reporting system access to which requires use of a password or other authorized identifier.  The instructions may be delivered by hand, mail, tested telegram, cable, telex or facsimile sending device.

 

 

 

2.

Appointment .   The Fund hereby appoints PFPC Distributors to serve as the distributor of its Shares in accordance with the terms set forth in this Agreement.  PFPC Distributors accepts such appointment and agrees to furnish such services. The Fund understands that PFPC Distributors is now, and may in the future be, the distributor of the shares of several investment companies or series (collectively, the “Investment Entities”), including Investment Entities having investment objectives similar to those of the Fund.  The Fund

2


 

further understands that investors and potential investors in the Fund may invest in shares of such other Investment Entities.  The Fund agrees that PFPC Distributors’ duties to such Investment Entities shall not be deemed in conflict with its duties to the Fund under this Agreement.

 

 

 

3.

Compliance with Rules and Regulations .   PFPC Distributors undertakes to comply with all applicable requirements of the Securities Laws and any laws, rules and regulations of governmental authorities having jurisdiction with respect to the duties to be performed by PFPC Distributors hereunder.  Except as specifically set forth herein, PFPC Distributors assumes no responsibility for such compliance by the Fund or any other entity.

 

 

 

4.

Instructions .

 

 

 

 

(a)

Unless otherwise provided in this Agreement, PFPC Distributors shall act only upon Oral Instructions or Written Instructions.

 

 

 

 

(b)

PFPC Distributors shall be entitled to rely upon any Oral Instruction or Written Instruction it receives from an Authorized Person (or from a person reasonably believed by PFPC Distributors to be an Authorized Person) pursuant to this Agreement.  PFPC Distributors may assume that any Oral Instruction or Written Instruction received hereunder is not in any way inconsistent with the provisions of organizational documents or this Agreement or of any vote, resolution or proceeding of the Fund’s Board of Directors or Trustees or of the Fund’s shareholders, unless and until PFPC Distributors receives Written Instructions to the contrary.

 

 

 

 

(c)

The Fund agrees to forward to PFPC Distributors Written Instructions confirming

3


 

 

Oral Instructions so that PFPC Distributors receives the Written Instructions by the close of business on the same day that such Oral Instructions are received.  The fact that such confirming Written Instructions are not received by PFPC Distributors or differ from the Oral Instructions shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions or PFPC Distributors’ ability to rely upon such Oral Instructions.  Where Oral Instructions or Written Instructions reasonably appear to have been received from an Authorized Person, PFPC Distributors shall incur no liability to the Fund in acting upon such Oral Instructions or Written Instructions provided that PFPC Distributors’ actions comply with the other provisions of this Agreement.

 

 

 

5.

Right to Receive Advice .

 

 

 

(a)

Advice of the Fund .  If PFPC Distributors is in doubt as to any action it should or should not take, PFPC Distributors may request directions or advice, including Oral Instructions or Written Instructions, from the Fund.

 

 

 

 

(b)

Advice of Counsel .  If PFPC Distributors shall be in doubt as to any question of law pertaining to any action it should or should not take, PFPC Distributors may request advice from counsel of its own choosing (who may be counsel for the Fund, the Fund’s investment adviser or PFPC Distributors, at the option of PFPC Distributors).

 

 

 

 

(c)

Conflicting Advice .  In the event of a conflict between directions or advice or Oral Instructions or Written Instructions PFPC Distributors receives from the Fund, and the advice it receives from counsel, PFPC Distributors may rely upon and

4


 

 

follow the advice of counsel.

 

 

 

 

(d)

Protection of PFPC Distributors .  PFPC Distributors shall be protected in any action it takes or does not take in reliance upon directions or advice or Oral Instructions or Written Instructions it receives from the Fund or from counsel and which PFPC Distributors believes, in good faith, to be consistent with those directions or advice or Oral Instructions or Written Instructions.  Nothing in this section shall be construed so as to impose an obligation upon PFPC Distributors (i) to seek such directions or advice or Oral Instructions or Written Instructions, or (ii) to act in accordance with such directions or advice or Oral Instructions or Written Instructions unless, under the terms of other provisions of this Agreement, the same is a condition of PFPC Distributors’ properly taking or not taking such action.

 

 

 

6.

Records; Visits .   The books and records pertaining to the Fund, which are in the possession or under the control of PFPC Distributors, shall be the property of the Fund.  Such books and records shall be prepared and maintained as required by the 1940 Act and other applicable securities laws, rules and regulations.  The Fund and its duly authorized officers, employees, and agents and the staff of the SEC shall have access to such books and records at all times during PFPC Distributors’ normal business hours.  Upon the reasonable request of the Fund, copies of any such books and records shall be provided by PFPC Distributors to the Fund or to an Authorized Person, at the Fund’s expense.  Any such books and records may be maintained in the form of electronic media and stored on any magnetic disk or tape or similar recording method.

5


7.

Confidentiality .

 

 

 

(a)

Each party shall keep confidential any information relating to the other party’s business  (“Confidential Information”).  Confidential Information shall include (i) any data or information that is competitively sensitive material, and not generally known to the public, including, but not limited to, information about product plans, marketing strategies, finances, operations, customer relationships, customer profiles, customer lists, sales estimates, business plans, and internal performance results relating to the past, present or future business activities of the Fund or PFPC Distributors, their respective subsidiaries and affiliated companies and the customers, clients and suppliers of any of them; (ii) any scientific or technical information, design, process, procedure, formula, or improvement that is commercially valuable and secret in the sense that its confidentiality affords the Fund or PFPC Distributors a competitive advantage over its competitors; (iii) all confidential or proprietary concepts, documentation, reports, data, specifications, computer software, source code, object code, flow charts, databases, inventions, know-how, and trade secrets, whether or not patentable or copyrightable; and (iv) anything designated as confidential. Notwithstanding the foregoing, information shall not be Confidential Information and shall not be subject to such confidentiality obligations if it: (i) is already known to the receiving party at the time it is obtained; (ii) is or becomes publicly known or available through no wrongful act of the receiving party; (iii) is rightfully received from a third party who, to the best of the receiving party’s knowledge, is not under a duty of confidentiality; (iv) is released by the protected party to a third party without restriction; (v) is requested or required to be disclosed by the receiving party

6


 

 

pursuant to a court order, subpoena, governmental or regulatory agency request or law (provided the receiving party will provide the other party written notice of the same, to the extent such notice is permitted); (vi) is relevant to the defense of any claim or cause of action asserted against the receiving party; (vii) is Fund information provided by PFPC Distributors in connection with an independent third party compliance or other review; or (viii) has been or is independently developed or obtained by the receiving party.  The provisions of this Section 7 shall survive termination of this Agreement for a period of three (3) years after such termination.

 

 

 

 

(b)

Notwithstanding any provision herein to the contrary, each party hereto agrees that any Nonpublic Personal Information, as defined under Section 248.3(t) of Regulation S-P (“Regulation S-P”), promulgated under the Gramm-Leach-Bliley Act (the “Act”), disclosed by a party hereunder is for the specific purpose of permitting the other party to perform the services set forth in this Agreement.  Each party agrees that, with respect to such information, it will comply with Regulation S-P and the Act and that it will not disclose any Nonpublic Personal Information received in connection with this Agreement to any other party, except to the extent as necessary to carry out the services set forth in this Agreement or as otherwise permitted by Regulation S-P or the Act.

 

 

 

8.

Compensation .

 

 

 

 

(a)

As compensation for services rendered by PFPC Distributors during the term of this Agreement, the Fund will pay to PFPC Distributors a fee or fees as may be agreed to from time to time in writing by the Fund and PFPC Distributors.  The Fund acknowledges

7



 

 

that PFPC Distributors may receive float benefits and/or investment earnings in connection with maintaining certain accounts required to provide services under this Agreement.

 

 

 

 

(b)

The undersigned hereby represents and warrants to PFPC Distributors that (i) the terms of this Agreement and (ii) the fees and expenses associated with this Agreement, have been fully disclosed to the Board of Directors or Trustees of the Fund and that, if required by applicable law, such Board of Directors or Trustees has approved or will approve the terms of this Agreement, any such fees and expenses, and any such benefits.

 

 

 

9.

Indemnification .

 

 

 

(a)

The Fund agrees to indemnify and hold harmless PFPC Distributors and its affiliates from all taxes, charges, expenses, assessments, claims and liabilities (including, without limitation, attorneys’ fees and disbursements and liabilities arising under the Securities Laws and any state and foreign securities and blue sky laws) arising directly or indirectly from any action or omission to act which PFPC Distributors takes in connection with the provision of services to the Fund.  Neither PFPC Distributors, nor any of its affiliates, shall be indemnified against any liability (or any expenses incident to such liability) caused by PFPC Distributors’ or its affiliates’ own willful misfeasance, bad faith, negligence or reckless disregard of its duties and obligations under this Agreement.

 

 

 

 

(b)

The Fund agrees to indemnify and hold harmless PFPC Distributors, its officers, directors, and employees, and any person who controls PFPC Distributors within the meaning of Section 15 of the 1933 Act, free and harmless (a) from and against any and all claims, costs, expenses (including reasonable attorneys’ fees) losses,

8


 

 

damages, charges, payments and liabilities of any sort or kind which PFPC Distributors, its officers, directors, employees or any such controlling person may incur under the 1933 Act, under any other statute, at common law or otherwise, arising out of or based upon:  (i) any untrue statement, or alleged untrue statement, of a material fact contained in the Fund’s Registration Statement, Prospectus, Statement of Additional Information, or sales literature (including amendments and supplements thereto), or (ii) any omission, or alleged omission, to state a material fact required to be stated in the Fund’s Registration Statement, Prospectus, Statement of Additional Information or sales literature (including amendments or supplements thereto), necessary to make the statements therein not misleading, provided, however, that insofar as losses, claims, damages, liabilities or expenses arise out of or are based upon any such untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information furnished to the Fund by PFPC Distributors or its affiliated persons for use in the Fund’s Registration Statement, Prospectus, or Statement of Additional Information or sales literature (including amendments or supplements thereto), such indemnification is not applicable; and (b) from and against any and all such claims, demands, liabilities and expenses (including such costs and counsel fees) which you, your officers and directors, or such controlling person, may incur in connection with this Agreement or PFPC Distributors’ performance hereunder (but excluding such claims, demands, liabilities and expenses (including such costs and counsel fees) arising out of or based upon any untrue statement, or alleged untrue statement, of a material fact contained in any

9


 

 

Registration Statement or any Prospectus or arising out of or based upon any omission, or alleged omission, to state a material fact required to be stated in either any Registration Statement or any Prospectus or necessary to make the statements in either thereof not misleading), unless such claims, demands, liabilities and expenses (including such costs and counsel fees) arise by reason of PFPC Distributors’ willful misfeasance, bad faith or negligence in the performance of PFPC Distributors’ duties hereunder.  The Fund acknowledges and agrees that in the event that PFPC Distributors, at the request of the Fund, is required to give indemnification comparable to that set forth in this paragraph to any broker-dealer selling Shares of the Fund or servicing agent servicing the shareholders of the Fund and such broker-dealer or servicing agent shall make a claim for indemnification against PFPC Distributors, PFPC Distributors shall make a similar claim for indemnification against the Fund.

 

 

 

 

(c)

PFPC Distributors agrees to indemnify and hold harmless the Fund, its several officers and Board Members and each person, if any, who controls a Portfolio within the meaning of Section 15 of the 1933 Act against any and all claims, costs, expenses (including reasonable attorneys’ fees), losses, damages, charges, payments and liabilities of any sort or kind which the Fund, its officers, Board Members or any such controlling person may incur under the 1933 Act, under any other statute, at common law or otherwise, but only to the extent that such liability or expense incurred by the Fund, its officers or Board Members, or any controlling person resulting from such claims or demands arose out of the acquisition of any Shares by any person which may be based upon any untrue statement, or alleged

10


 

 

untrue statement, of a material fact contained in the Fund’s Registration Statement, Prospectus or Statement of Additional Information (including amendments and supplements thereto), or any omission, or alleged omission, to state a material fact required to be stated therein or necessary to make the statements therein not misleading, if such statement or omission was made in reliance upon information furnished or confirmed in writing to the Fund by PFPC Distributors or its affiliated persons (as defined in the 1940 Act).  The foregoing rights of indemnification shall be in addition to any other rights to which the Fund or any such person shall be entitled to as a matter of law.

 

 

 

 

(d)

In any case in which one party hereto (the “Indemnifying Party”) may be asked to indemnify or hold the other party hereto (the “Indemnified Party”) harmless, the Indemnified Party will notify the Indemnifying Party promptly after identifying any situation which it believes presents or appears likely to present a claim for indemnification (an “Indemnification Claim”) against the Indemnifying Party, although the failure to do so shall not prevent recovery by the Indemnified Party, and shall keep the Indemnifying Party advised with respect to all developments concerning such situation. The Indemnifying Party shall have the option to defend the Indemnified Party against any Indemnification Claim which may be the subject of this indemnification, and, in the event that the Indemnifying Party so elects, such defense shall be conducted by counsel chosen by the Indemnifying Party and satisfactory to the Indemnified Party, and thereupon the Indemnifying Party shall take over complete defense of the Indemnification Claim and the Indemnified Party shall sustain no further legal or other expenses in respect of

11


 

 

such Indemnification Claim. In the event that the Indemnifying Party does not elect to assume the defense of any such suit, or in case the Indemnified Party reasonably does not approve of counsel chosen by the Indemnifying Party, or in case there is a conflict of interest between the Indemnifying Party or the Indemnified Party, the Indemnifying Party will reimburse the Indemnified Party for the fees and expenses of any counsel retained by the Indemnified Party.  Each party  agrees promptly to notify the other party of the commencement of any litigation or proceedings against the notifying party or any of its officers or directors in connection with the issue and sale of any Shares.  The Indemnified Party will not confess any Indemnification Claim or make any compromise in any case in which the Indemnifying Party will be asked to provide indemnification, except with the Indemnifying Party’s prior written consent.

 

 

 

10.

Responsibility of PFPC Distributors .

 

 

 

(a)

PFPC Distributors shall be under no duty to take any action hereunder on behalf of the Fund except as specifically set forth herein or as may be specifically agreed to by PFPC Distributors and the Fund in a written amendment hereto.  PFPC Distributors shall be obligated to exercise care and diligence in the performance of its duties hereunder and to act in good faith in performing services provided for under this Agreement.  PFPC Distributors shall be liable only for any damages arising out of PFPC Distributors’ failure to perform its duties under this Agreement to the extent such damages arise out of PFPC Distributors’ willful misfeasance, bad faith, negligence or reckless disregard of such duties.

 

 

 

 

(b)

Without limiting the generality of the foregoing or of any other provision of this

12


 

 

Agreement, (i) PFPC Distributors shall not be liable for losses beyond its control, provided that PFPC Distributors has acted in accordance with the standard of care set forth above; and (ii) PFPC Distributors shall not be liable for (A) the validity or invalidity or authority or lack thereof of any Oral Instruction or Written Instruction, notice or other instrument which conforms to the applicable requirements of this Agreement and which PFPC Distributors reasonably believes to be genuine; or (B) subject to Section 10(a), delays or errors or loss of data occurring by reason of circumstances beyond PFPC Distributors’ control, including acts of civil or military authority, national emergencies, labor difficulties, fire, flood, catastrophe, acts of God, insurrection, war, riots or failure of the mails, transportation, communication or power supply.

 

 

 

 

(c)

Notwithstanding anything in this Agreement to the contrary, neither PFPC Distributors nor its affiliates shall be liable for any consequential, special or indirect losses or damages, whether or not the likelihood of such losses or damages was known by PFPC Distributors or its affiliates.

 

 

 

 

(d)

Each party shall have a duty to mitigate damages for which the other party may become responsible.

 

 

 

 

(e)

Notwithstanding anything in this Agreement to the contrary, PFPC shall have no liability either for any error or omission of any of its predecessors as servicer on behalf of the Fund or for any failure to discover any such error or omission.


11.

Duties and Obligations of the Fund.

 

 

 

(a)

The Fund represents to PFPC Distributors that all Registration Statements and Prospectuses filed by the Fund with the SEC under the 1933 Act with respect to

13

 

 

the Shares have been prepared in conformity with the requirements of the 1933 Act and the rules and regulations of the SEC thereunder.  Except as to information included in the Registration Statement in reliance upon information provided to the Fund by PFPC Distributors or any affiliate of PFPC Distributors expressly for use in the Registration Statement, the Fund represents and warrants to PFPC Distributors that any Registration Statement, when such Registration Statement becomes effective, will contain statements required to be stated therein in conformity with the 1933 Act and the rules and regulations of the SEC; that all statements of fact contained in any such Registration Statement will be true and correct when such Registration Statement becomes effective; and that no Registration Statement when such Registration Statement becomes effective will include an untrue statement of a material fact or omit to state a material fact required to be stated therein or n ecessary to make the statements therein not misleading to a purchaser of the Shares.  PFPC Distributors may but shall not be obligated to propose from time to time such amendment or amendments to any Registration Statement and such supplement or supplements to any Prospectus as, in the light of future developments, may, in the opinion of the PFPC Distributors’ counsel, be necessary or advisable.  PFPC Distributors shall promptly notify the Fund of any advice given to it by its counsel regarding the necessity or advisability of amending or supplementing such Registration Statement.  If the Fund shall not propose such amendment or amendments and/or supplement or supplements within fifteen days after receipt by the Fund of a written request from PFPC Distributors to do so, PFPC Distributors may, at its option, terminate this

14


 

 

Agreement.  The Fund shall not file any amendment to any Registration Statement or supplement to any Prospectus without giving PFPC Distributors reasonable notice thereof in advance; provided, however, that nothing contained in this Agreement shall in any way limit the Fund’s right to file at any time such amendments to any Registration Statements and/or supplements to any Prospectus, of whatever character, as the Fund may deem advisable, such right being in all respects absolute and unconditional. The Fund authorizes PFPC Distributors to use any Prospectus or Statement of Additional Information in the form furnished from time to time in connection with the sale of the Shares.

 

 

 

 

(b)

The Fund represents and warrants to PFPC Distributors that the Fund is a series of investment company registered under the 1940 Act and the Shares sold by each Portfolio are, and will be, registered under the 1933 Act.

 

 

 

 

(c)

The net asset value of the Shares shall be determined in the manner provided in the then current Prospectus and Statement of Additional Information relating to the Shares, and when determined shall be applicable to all transactions as provided in the Prospectus.  The net asset value of the Shares shall be calculated by the Fund or by another entity on behalf of the Fund.  PFPC Distributors shall have no duty to inquire into, or liability for, the accuracy of the net asset value per Share as calculated.

 

 

 

 

(d)

Whenever in its judgment such action is warranted by unusual market, economic or political conditions or abnormal circumstances of any kind, the Fund may decline to accept any orders for, or make any sales of, the Shares until such time as the Fund deems it advisable to accept such orders and to make such sales, and

15


 

 

the Fund advises PFPC Distributors promptly of such determination.

 

 

 

 

(e)

The Fund agrees to execute any and all documents and to furnish any and all information and otherwise to take all actions that may be reasonably necessary in connection with the notice filings in connection with the sale  of Shares in such states as PFPC Distributors may designate.  The Fund shall notify PFPC Distributors in writing of the states in which the Shares may be sold and shall notify PFPC Distributors in writing of any changes to the information contained in the previous notification.

 

 

 

12.

Duties and Obligations of PFPC Distributors .

 

 

 

(a)

PFPC Distributors will act on behalf of the Fund for the distribution of the Shares covered by the Registration Statement under the 1933 Act and provide the distribution services outlined below and as follows:  (i) preparation and execution of sales or servicing agreements, (ii) preparation of quarterly 12b-1 Reports to the Board, (iii) literature review, recommendations and submission to the NASD.

 

 

 

 

(b)

PFPC Distributors agrees to use efforts deemed appropriate by PFPC Distributors to solicit orders for the sale of the Shares and will undertake such advertising and promotion as it believes reasonable in connection with such solicitation.  To the extent that PFPC Distributors receives fees under any plan adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act, PFPC Distributors agrees to furnish and/or enter into arrangements with others for the furnishing of marketing or sales services with respect to the Shares as may be required pursuant to such plan.  To the extent that PFPC Distributors receives shareholder services fees under any shareholder services plan adopted by the Fund, PFPC Distributors agrees to

16


 

 

furnish and/or enter into arrangements with others for the furnishing of, personal and/or account maintenance services with respect to the relevant shareholders of the Fund as may be required pursuant to such plan.  It is contemplated that PFPC Distributors will enter into sales or servicing agreements with securities dealers, financial institutions and other industry professionals, such as investment advisers, accountants and estate planning firms. PFPC Distributors will require each dealer with whom PFPC Distributors has a selling agreement to conform to the applicable provisions of the Prospectus.

 

 

 

 

(c)

PFPC Distributors shall not utilize any materials in connection with the sale or offering of Shares except the Fund’s Prospectus and Statement of Additional Information and such other materials as the Fund shall provide or approve. The Fund agrees to furnish PFPC Distributors with sufficient copies of any and all:  agreements, plans, communications with the public or other materials which the Fund intends to use in connection any sales of Shares, in adequate time for PFPC Distributors to file and clear such materials with the proper authorities before they are put in use.  PFPC Distributors and the Fund may agree that any such material does not need to be filed subsequent to distribution.  In addition, the Fund agrees not to use any such materials until so filed and cleared for use, if required, by appropriate authorities as well as by PFPC Distributors.

 

 

 

 

(d)

PFPC Distributors will transmit any orders received by it for purchase or redemption of the Shares to the transfer agent for the Fund. PFPC Distributors will have no liability for payment for the purchase of Shares sold pursuant to this Agreement or with respect to redemptions or repurchases of Shares.

17


 

(e)

No Shares shall be offered by either PFPC Distributors or the Fund under any of the provisions of this Agreement and no orders for the purchase or sale of Shares hereunder shall be accepted by the Fund if and so long as effectiveness of the Registration Statement then in effect or any necessary amendments thereto shall be suspended under any of the provisions of the 1933 Act, or if and so long as a current Prospectus as required by Section 5(b)(2) of the 1933 Act is not on file with the SEC; provided, however, that nothing contained in this paragraph shall in any way restrict or have any application to or bearing upon the Fund’s obligation to redeem Shares tendered for redemption by any shareholder in accordance with the provisions of the Fund’s Registration Statement, Agreement and Declaration of Trust, or By-Laws.

 

 

 

13.

Duration and Termination . This Agreement shall become effective on the date first written above and, unless sooner terminated as provided herein, shall continue for an initial two-year term and thereafter shall be renewed annually, provided such continuance is specifically approved by (i) the Fund’s Board of Trustees or (ii) by a vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Fund, provided that in either event the continuance is also approved by a majority of the Board Members who are not parties to this Agreement and who are not interested persons (as defined in the 1940 Act) of any party to this Agreement, by vote cast in person at a meeting called for the purpose of voting on such approval.  This Agreement is terminable without penalty, on at least sixty days’ written notice, by the Fund’s Board of Trustees, by vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Fund, or by PFPC Distributors.  This Agreement will also terminate automatically in the event of

   

18


 

its assignment (as defined in the 1940 Act and the rules thereunder).  In the event the Fund gives notice of termination, all expenses associated with movement (or duplication) of records and materials and conversion thereof to a successor service provider, and all trailing expenses incurred by PFPC Distributors, will be borne by the Fund.

 

 

14.

Notices .   Notices shall be addressed (a) if to PFPC Distributors, at 301 Bellevue Parkway, Wilmington, Delaware 19809, Attention: President (or such other address as PFPC may inform the Fund in writing); (b) if to the Fund, at Suite 800, 13455 Noel Road, Dallas, Texas 75240, Attention: Secretary of the foregoing or (c) if to neither of the foregoing, at such other address as shall have been given by like notice to the sender of any such notice or other communication by the other party.  If notice is sent by confirming telegram, cable, telex or facsimile sending device, it shall be deemed to have been given immediately.  If notice is sent by first-class mail, it shall be deemed to have been given three days after it has been mailed.  If notice is sent by messenger, it shall be deemed to have been given on the day it is delivered.

 

 

15.

Amendments .   This Agreement, or any term hereof, may be changed or waived only by a written amendment, signed by the party against whom enforcement of such change or waiver is sought.

 

 

16.

Counterparts .   This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

 

 

17.

Further Actions .   Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof.

19


19.

Miscellaneous .

 

 

 

(a)

Entire Agreement .  This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties may embody in one or more separate documents their agreement, if any, with respect to delegated duties.

 

 

 

 

(b)

No Changes that Materially Affect Obligations .  Notwithstanding anything in this Agreement to the contrary, the Fund agrees not to make any modifications to its registration statement or adopt any policies which would affect materially the obligations or responsibilities of PFPC Distributors hereunder without the prior written approval of PFPC Distributors, which approval shall not be unreasonably withheld or delayed.

 

 

 

 

(c)

Captions .  The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.

 

 

 

 

(d)

Information . The Fund will provide such information and documentation as PFPC Distributors may reasonably request in connection with services provided by PFPC Distributors to the Fund.

 

 

 

 

(e)

Governing Law .  This Agreement shall be deemed to be a contract made in Delaware and governed by Delaware law, without regard to principles of conflicts of law.

 

 

 

 

(f)

Partial Invalidity .  If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.

20


 

(g)

Successors and Assigns .  This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.

 

 

 

 

(h)

No Representations or Warranties .  Except as expressly provided in this Agreement, PFPC Distributors hereby disclaims all representations and warranties, express or implied, made to the Fund or any other person, including, without limitation, any warranties regarding quality, suitability, merchantability, fitness for a particular purpose or otherwise (irrespective of any course of dealing, custom or usage of trade), of any services or any goods provided incidental to services provided under this Agreement.  PFPC Distributors disclaims any warranty of title or non-infringement except as otherwise set forth in this Agreement.

 

 

 

 

(i)

Facsimile Signatures .  The facsimile signature of any party to this Agreement shall constitute the valid and binding execution hereof by such party.

 

 

 

 

(j)

Customer Identification Program Notice . To help the U.S. government fight the funding of terrorism and money laundering activities, U.S. Federal law requires each financial institution to obtain, verify, and record certain information that identifies each person who initially opens an account with that financial institution on or after October 1, 2003. Consistent with this requirement, PFPC Distributors will request (or already has requested) the Fund’s name, address and taxpayer identification number or other government-issued identification number, and, if such party is a natural person, that party’s date of birth. PFPC Distributor may also ask (and may have already asked) for additional identifying information, and

21


 

 

PFPC Distributor may take steps (and may have already taken steps) to verify the authenticity and accuracy of these data elements.

22


          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.

 

PFPC DISTRIBUTORS, INC.

 

 

 

 

By:

 

 

 

 

 

 

 

Title:

 

 

 

 

 

 

 

 

 

 

HIGHLAND FUNDS I

 

 

 

 

By:

 

 

 

 

 

 

 

Title:

 

 

 

23


EXHIBIT A

THIS EXHIBIT A, dated as of                     , 2006 , is Exhibit A to that certain Underwriting Agreement dated as of                      , 2006, between PFPC Distributors, Inc. and       Highland Funds I. 

PORTFOLIOS

HIGHLAND EQUITY OPPORTUNITIES FUND

24

CUSTODIAN SERVICES AGREEMENT

          THIS AGREEMENT is made as of                 , 2006 by and between PFPC TRUST COMPANY, a limited purpose trust company incorporated under the laws of Delaware (“PFPC Trust”), and HIGHLAND FUNDS I, a Delaware statutory trust (the “Fund”).

W I T N E S S E T H:

          WHEREAS, the Fund is registered as an open-end, non-diversified management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”); and

          WHEREAS, the Fund wishes to retain PFPC Trust to provide custodian services, and PFPC Trust wishes to furnish custodian services, either directly or through an affiliate or affiliates, as more fully described herein.

          NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows:    

1.

Definitions.   As used in this Agreement:

 

 

 

 

 

(a)

“1933 Act” means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder.

 

 

 

 

 

(b)

“1934 Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder.

 

 

 

 

  (c) “1940 Act” has the meaning set forth in the recitals hereof and includes the rules and regulations of the SEC promulgated thereunder.
     

 

(d)

“Authorized Person” means any officer of the Fund and any other person duly

1


 

 

authorized by the Fund’s Board of Directors to give Oral Instructions or Written Instructions on behalf of the Fund and listed on the Authorized Persons Appendix attached hereto and made a part hereof or any amendment thereto as may be received by PFPC.  An Authorized Person’s scope of authority may be limited by the Fund by setting forth such limitation in the Authorized Persons Appendix.

 

 

 

 

 

(e)

“Board of Directors” and “Shareholders” shall have the same meanings as used in the Fund’s organizational documents.

 

 

 

 

 

(f)

“Book-Entry System” means the Federal Reserve Treasury book-entry system for United States and federal agency securities, its successor or successors, and its nominee or nominees and any book-entry system registered with the SEC under the 1934 Act.

 

 

 

 

 

(g)

“Oral Instructions” mean oral instructions received by PFPC Trust from an Authorized Person or from a person reasonably believed by PFPC Trust to be an Authorized Person. PFPC Trust may, in its sole discretion in each separate instance, consider and rely upon instructions it receives from an Authorized Person via electronic mail as Oral Instructions.

 

 

 

 

 

(h)

“PFPC Trust” means PFPC Trust Company or a subsidiary or affiliate of PFPC Trust Company.

 

 

 

 

 

(i)

“SEC” means the Securities and Exchange Commission.

 

 

 

 

 

(j)

“Securities Laws” mean the 1933 Act, the 1934 Act and the 1940 Act.

 

 

 

 

 

(k)

“Securities” means securities (including without limitation equities, debt obligation, options, and other “securities” as that term is defined in Section 2(a)(36) of the 1940 Act) and any contracts for forward or future delivery of any

2


    security, debt obligation or currency or commodity, all manner of derivative instruments and any contracts based on any index or group of securities or debt obligations or currencies or commodities, and any options thereon, as well as investments in registered investment companies and private investment funds.
     

 

(l)

“Shares” mean the Fund’s shares of beneficial interest.

 

 

 

 

 

(m)

“Property” means:

 

 

 

 

 

 

(i)

any and all Securities and other investment items which the Fund may from time to time deposit, or cause to be deposited, with PFPC Trust or which PFPC Trust may from time to time hold for the Fund;

 

 

 

 

 

 

(ii)

all income in respect of any of such Securities or other investment items;

 

 

 

 

 

 

(iii)

all proceeds of the sale of any of such Securities or investment items; and

 

 

 

 

 

 

(iv)

all proceeds of the sale of Securities issued by the Fund, which are received by PFPC Trust from time to time, from or on behalf of the Fund.

 

 

 

 

 

(n)

“Written Instructions” mean (i) written instructions signed by an Authorized Person and received by PFPC Trust or (ii) trade instructions transmitted (and received by PFPC Trust) by means of an electronic transaction reporting system, access to which requires use of a password or other authorized identifier. The instructions may be delivered electronically (with respect to sub-item (ii) above) or by hand, mail or facsimile sending device.

 

 

 

 

2. Appointment .   The Fund hereby appoints PFPC Trust to provide custodian services to the Fund as set forth herein, on behalf of each of its investment portfolios (each, a “Portfolio”), and PFPC Trust accepts such appointment and agrees to furnish such services.
   

3.

Compliance with Rules and Regulations .

3


 

PFPC Trust agrees to comply with the applicable requirements of the Securities Laws and any laws, rules and regulations of governmental authorities having jurisdiction with respect to the duties to be performed by PFPC Trust hereunder.  Except as specifically set forth herein, PFPC Trust assumes no responsibility for such compliance by the Fund.

 

 

 

 

4.

Instructions .

 

 

 

 

 

(a)

Unless otherwise provided in this Agreement, PFPC Trust shall act only upon Oral Instructions or Written Instructions, including standing Written Instructions related to ongoing instructions received electronically. 

 

 

 

 

 

(b)

PFPC Trust shall be entitled to rely upon any Oral Instruction or Written Instruction it receives from an Authorized Person (or from a person reasonably believed by PFPC Trust to be an Authorized Person) pursuant to this Agreement.  PFPC Trust may assume that any Oral Instruction or Written Instruction received hereunder is not in any way inconsistent with the provisions of organizational documents or this Agreement or of any vote, resolution or proceeding of the Fund’s Board of Directors or of the Fund’s Shareholders, unless and until PFPC Trust receives Written Instructions to the contrary.

 

 

 

 

 

(c)

The Fund agrees to forward to PFPC Trust Written Instructions confirming Oral Instructions (except where such Oral Instructions are given by PFPC Trust or its affiliates) and shall endeavor to ensure that PFPC Trust receives the Written Instructions by the close of business on the same day that such Oral Instructions are received.  The fact that such confirming Written Instructions are not received by PFPC Trust shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions. Where Oral Instructions or Written Instructions reasonably appear to have been received from an Authorized Person, PFPC Trust shall incur no liability to the Fund in acting upon such Oral Instructions or

4


 

Written Instructions provided that PFPC Trust’s actions comply with the other provisions of this Agreement.

 

 

5.

Right to Receive Advice .

 

 

 

 

 

(a)

Advice of the Fund .  If PFPC Trust is in doubt as to any action it should or should not take, PFPC Trust may request directions or advice, including Oral Instructions or Written Instructions, from the Fund.

 

 

 

 

 

(b)

Advice of Counsel .  If PFPC Trust shall be in doubt as to any question of law pertaining to any action it should or should not take, PFPC Trust may request advice at its own cost from such counsel of its own choosing (who may be counsel for the Fund, the Fund’s investment adviser or PFPC Trust, at the option of PFPC Trust).

 

 

 

 

 

(c)

Conflicting Advice .  In the event of a conflict between directions or advice or Oral Instructions or Written Instructions PFPC Trust receives from the Fund, and the advice it receives from counsel, PFPC Trust shall be entitled to rely upon and follow the advice of counsel, provided that such counsel is selected with reasonable care. PFPC Trust shall promptly inform the Fund of such conflict and PFPC Trust shall refrain from acting in the event of a conflict unless counsel advises PFPC Trust that a failure to take action is likely to result in additional loss, liability or expense. In the event PFPC relies on the advice of counsel, PFPC Trust remains liable for any action or omission on the part of PFPC Trust which constitutes willful misfeasance, bad faith, negligence or reckless disregard by

5


    PFPC Trust of any duties, obligations or responsibilities set forth in this Agreement.

 

 

 

 

(d)

Protection of PFPC Trust .  PFPC Trust shall be protected in any action it takes or does not take in reliance upon directions, advice or Oral Instructions or Written Instructions it receives from the Fund or (to the extent permitted under clause (c) above) from counsel and which PFPC Trust believes, in good faith, to be consistent with those directions or advice or Oral Instructions or Written Instructions.  Nothing in this section shall be construed  so as to impose an obligation upon PFPC Trust (i) to seek such directions or advice or Oral Instructions or Written Instructions, or (ii) to act in accordance with such directions, advice or Oral Instructions or Written Instructions unless, under the terms of other provisions of this Agreement, the same is a condition of PFPC Trust’s properly taking or not taking such action. Nothing in this subsection shall excuse PFPC Trust when an action or omission on the part of PFPC Trust constitutes willful misfeasance, bad faith, negligence or reckless disregard by PFPC Trust of any duties, obligations or responsibilities set forth in this Agreement.

 

 

 

 

6.

Records; Visits .   The books and records pertaining to the Fund and any Portfolio, which are in the possession or under the control of PFPC Trust, shall be the property of the Fund.  Such books and records shall be prepared, preserved and maintained as required by the 1940 Act and other applicable securities laws, rules and regulations.  The Fund and its duly authorized officers, employees and agents and the staff of the SEC shall have access to such books and records at all times during PFPC Trust’s normal business hours.  Upon

6


  the reasonable request of the Fund, copies of any such books and records shall be provided by PFPC Trust to the Fund or to an Authorized Person, at the Fund’s expense.

 

 

7.

Confidentiality .   Each party shall keep confidential any information relating to the other party’s business  (“Confidential Information”).  Confidential Information shall include (a) any data or information that is competitively sensitive material, and not generally known to the public, including, but not limited to, information about product plans, marketing strategies, finances, operations, customer relationships, customer profiles, customer lists, sales estimates, business plans, and internal performance results relating to the past, present or future business activities of the Fund or PFPC Trust, their respective subsidiaries and affiliated companies and the customers, clients and suppliers of any of them; (b) any scientific or technical information, design, process, procedure, formula, or improvement that is commercially valuable and secret in the sense that its confidentiality affords the Fund or PFPC Trust a competitive advantage over its competitors; (c) all confidential or proprietary concepts, documentation, reports, data, specifications, computer software, source code, object code, flow charts, databases, inventions, know-how, and trade secrets, whether or not patentable or copyrightable; and (d) anything designated as confidential. Notwithstanding the foregoing, information shall not be subject to such confidentiality obligations if it: (a) is already known to the receiving party at the time it is obtained; (b) is or becomes publicly known or available through no wrongful act of the receiving party; (c) is rightfully received from a third party who, to the best of the receiving party’s knowledge, is not under a duty of confidentiality; (d) is released by the protected party to a third party without restriction; (e) is required to be disclosed by the receiving party pursuant to a requirement of a court order, subpoena,

7


  governmental or regulatory agency or law (provided the receiving party will provide the other party written notice of such requirement, to the extent such notice is permitted); (f) is relevant to the defense of any claim or cause of action asserted against the receiving party; or (g) has been or is independently developed or obtained by the receiving party.

 

 

8.

Cooperation with Accountants .   PFPC Trust shall cooperate with the Fund’s independent public accountants and shall take all reasonable action in the performance of its obligations under this Agreement to assure that the necessary information is made available to such independent public accountants as reasonably requested  by the Fund.

 

 

 

 

9.

PFPC System .  PFPC Trust shall retain title to and ownership of any and all data bases, computer programs, screen formats, report formats, interactive design techniques, derivative works, inventions, discoveries, patentable or copyrightable matters, concepts, expertise, patents, copyrights, trade secrets, and other related legal rights utilized by PFPC Trust in connection with the services provided by PFPC Trust to the Fund.

 

 

 

 

10.

Disaster Recovery .   PFPC Trust shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provisions for emergency use of electronic data processing equipment.  In the event of equipment failures, PFPC Trust shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions.  PFPC Trust shall have no liability with respect to the loss of data or service interruptions caused by equipment failure provided such loss or interruption is not caused by PFPC Trust’s own willful misfeasance, bad faith, negligence or reckless disregard of its duties or obligations under this Agreement.

 

 

 

 

11.

Compensation .

 

 

 

 

 

(a)

As compensation for custody services rendered by PFPC Trust during the term of

8


    this Agreement, the Fund, on behalf of each of the Portfolios, will pay to PFPC Trust a fee or fees as may be agreed to from time to time in writing by the Fund and PFPC Trust.  The Fund acknowledges that PFPC Trust may receive float benefits in connection with maintaining certain accounts required to provide services under this Agreement.

 

 

 

 

(b)

The undersigned hereby represents and warrants to PFPC Trust that (i) the terms of this Agreement and (ii) the fees and expenses associated with this Agreement have been approved by the Board of Directors of the Fund to the extent required by applicable law.

 

 

 

 

12.

Indemnification .

 

 

 

 

 

(a)

The Fund, on behalf of each Portfolio, agrees to indemnify and hold harmless PFPC Trust and its affiliates from all taxes, charges, expenses, assessments, claims and liabilities (including, without limitation, reasonable attorneys’ fees and disbursements and liabilities arising under the Securities Laws and any state and foreign securities and blue sky laws) (collectively, “Losses”) arising directly or indirectly from any action or omission to act which PFPC Trust takes (i) at the request or on the direction of or in reliance on the advice of the Fund or (ii) upon Oral Instructions or Written Instruction; provided, however, neither PFPC Trust nor any of its affiliates, shall be indemnified against any liability (or any expenses incident to such liability) arising out of PFPC Trust’s or its affiliates’ own willful misfeasance, bad faith, negligence or reckless disregard of its duties and obligations under this Agreement.

9


 

(b)

Notwithstanding anything in this Agreement to the contrary, the Fund shall not be liable to PFPC Trust or its affiliates for any consequential, special or indirect losses or damages which PFPC Trust or its affiliates may incur or suffer as a consequence of this Agreement, whether or not the likelihood of such damages or losses was known by the Fund.

 

 

13.

Responsibility of PFPC Trust .

 

 

 

 

 

(a)

PFPC Trust shall be under no duty to take any action on behalf of the Fund or any Portfolio except as necessary to fulfill its duties and obligations as specifically set forth herein or as may be specifically agreed to by PFPC Trust in writing.  PFPC Trust shall be obligated to exercise care and diligence in the performance of its duties hereunder and to act in good faith and to use its best efforts, within reasonable limits, in performing services provided for under this Agreement.  PFPC Trust agrees to indemnify and hold harmless the Fund from Losses arising out of PFPC Trust’s failure to perform its duties under this Agreement to the extent such damages arise out of PFPC Trust’s willful misfeasance, bad faith, negligence or reckless disregard of such duties.

 

 

 

 

 

(b)

Without limiting the generality of the foregoing or of any other provision of this Agreement, (i) PFPC Trust shall not be liable for losses beyond its control, provided that PFPC Trust has acted in accordance with the standard of care set forth above; and (ii) PFPC Trust shall not be liable for (A) the validity or invalidity or authority or lack thereof of any Oral Instruction or Written Instruction,  notice or other instrument which conforms to the applicable requirements of this Agreement and which PFPC Trust reasonably believes to be

10


    genuine; or (B) subject to Section 10, delays or errors  or loss of data occurring by reason of circumstances beyond PFPC Trust’s control, including acts of civil or military authority; national emergencies, labor difficulties, fire, flood, catastrophe, acts of God, insurrection, war, riots or failure of the mails, transportation, communication or power supply.

 

 

 

 

(c)

Notwithstanding anything in this Agreement to the contrary, neither PFPC Trust nor its affiliates shall be liable to the Fund for any consequential, special or indirect losses or damages which the Fund may incur or suffer by or as a consequence of PFPC Trust’s or its affiliates’ performance of the services provided hereunder, whether or not the likelihood of such losses or damages was known by PFPC Trust or its affiliates.

 

 

 

 

 

(d)

Notwithstanding anything in this Agreement to the contrary (other than as specifically provided in Section 14(h)(ii)(B)(4) and Section 14(h)(iii)(A) of this Agreement), the Fund shall be responsible for all filings, tax returns and reports on any transactions undertaken pursuant to this Agreement, or in respect of the Property or any collections undertaken pursuant to this Agreement, which may be requested by any relevant authority.  In addition, the Fund shall be responsible for the payment of all taxes and similar items (including without limitation penalties and interest related thereto).

 

 

 

 

14.

Description of Services .

 

 

 

 

 

(a)

Delivery of the Property .  The Fund will deliver or arrange for delivery to PFPC Trust, all the Property owned by the Portfolios, including cash received as a result of the distribution of Shares, during the term of this Agreement.  PFPC Trust will

11


    not be responsible for any assets until actual receipt.
     

 

(b)

Receipt and Disbursement of Money .  PFPC Trust, acting upon Written Instructions, shall open and maintain a separate account for each separate Portfolio of the Fund (each an “Account”) and shall maintain in the Account of a particular Portfolio all cash and other assets received from or for the Fund specifically designated to such Account.

   

 

PFPC Trust shall make cash payments from or for the Account of a Portfolio only for:

 

 

 

 

 

(i)

purchases of Securities in the name of a Portfolio, PFPC Trust, PFPC Trust’s nominee or a sub-custodian or nominee thereof as provided in sub-section (j) and for which PFPC Trust has received a copy of the broker’s or dealer’s confirmation or payee’s invoice, as appropriate;

 

 

 

 

 

(ii)

purchase or redemption of Shares of the Fund delivered to PFPC Trust;

 

 

 

 

 

(iii)

payment of, subject to Written Instructions, interest, taxes (provided that tax which PFPC Trust considers is required to be deducted or withheld “at source” will be governed by Section 14(h)(iii)(B) of this Agreement), administration, accounting, distribution, advisory and management fees which are to be borne by a Portfolio;

 

 

 

 

 

(iv)

payment to, subject to receipt of Written Instructions, the Fund’s transfer agent, as agent for the shareholders, of an amount equal to the amount of dividends and distributions stated in the Written Instructions to be distributed in cash by the transfer agent to shareholders, or, in lieu of paying the Fund’s transfer agent, PFPC Trust may arrange for the direct payment of cash dividends and distributions to shareholders in accordance with procedures mutually agreed upon from time to time by and among the Fund, PFPC Trust and the Fund’s transfer agent;

 

 

 

 

 

(v)

payments, upon receipt of Written Instructions signed by one Authorized Person, in connection with the conversion, exchange or surrender of Securities owned or subscribed to by the Fund and held by or delivered to PFPC Trust;

 

 

 

 

 

(vi)

payments of, subject to receipt of Written Instructions signed by one Authorized Person, the amounts of dividends received with respect to

12


 

 

Securities sold short;

 

 

 

 

(vii)

payments to PFPC Trust for its services hereunder;

 

 

 

 

 

(viii)

payments to a sub-custodian pursuant to provisions in sub-section (c) of this Section; and

 

 

 

 

(ix)

other payments, upon Written Instructions.

 

 

 

 

 

PFPC Trust is hereby authorized to endorse and collect all checks, drafts or other orders for the payment of money received as custodian for the Accounts.

 

 

 

 

 

(c)

Receipt of Securities; Subcustodians .

 

 

 

 

 

 

(i)

PFPC Trust shall hold all Securities received by it for the Account in a separate account that physically segregates such Securities from those relating to any other Account or any other persons, firms or corporations, except for Securities held in a Book-Entry System or through a sub-custodian or depository.  All such Securities shall be held or disposed of only upon Written Instructions of the Fund pursuant to the terms of this Agreement.  PFPC Trust shall have no power or authority to assign, hypothecate, pledge or otherwise dispose of any such Securities or investment, except upon the express terms of this Agreement or upon Written Instructions authorizing the transaction.  In no case may any member of the Fund’s Board of Directors, or any officer, employee or agent of the Fund withdraw any Securities.

 

 

 

 

 

 

 

At PFPC Trust’s own expense and for its own convenience, PFPC Trust may enter into sub-custodian agreements with other banks or trust companies to perform duties described in this sub-section (c) with respect to domestic assets.  Such bank or trust company shall have aggregate capital, surplus and undivided profits, according to its last published report, of at least one million dollars ($1,000,000), if it is a subsidiary or affiliate of PFPC Trust, or at least twenty million dollars ($20,000,000) if such bank or trust company is not a subsidiary or affiliate of PFPC Trust.  In addition, such bank or trust company must be qualified to act as custodian and agree to comply with the relevant provisions of applicable rules and regulations.  Any such arrangement will not be entered into without prior written notice to the Fund (or as otherwise provided in the 1940 Act).

 

 

 

 

 

 

 

In addition, PFPC Trust may enter into arrangements with sub-custodians with respect to services regarding foreign assets.  Any such arrangement will be entered into as agreed in writing with the Fund and in accordance

13


 

 

 

  with the 1940 Act).

 

 

 

 

 

 

 

Sub-custodians utilized by PFPC Trust may be subsidiaries or affiliates of PFPC Trust, and such entities will be compensated for their services at such rates as are agreed between the entity and PFPC Trust. PFPC Trust shall remain responsible for the acts and omissions of any sub-custodian chosen by PFPC Trust under the terms of this sub-section (c) to the same extent that PFPC Trust is responsible for its own acts and omissions under this Agreement.

 

 

 

 

(d)

Transactions Requiring Instructions .  Upon receipt of Oral Instructions or Written Instructions and not otherwise, PFPC Trust shall:

 

 

 

 

 

 

(i)

deliver any Securities held for a Portfolio against the receipt of payment for the sale of such Securities or otherwise in accordance with standard market practice;

 

 

 

 

 

 

(ii)

execute and deliver to such persons as may be designated in such Oral Instructions or Written Instructions, proxies, consents, authorizations, and any other instruments whereby the authority of a Portfolio as owner of any Securities may be exercised;

 

 

 

 

 

 

(iii)

deliver any Securities to the issuer thereof, or its agent, when such Securities are called, redeemed, retired or otherwise become payable at the option of the holder; provided that, in any such case, the cash or other consideration is to be delivered to PFPC Trust;

 

 

 

 

 

 

(iv)

deliver any Securities held for a Portfolio against receipt of other Securities or cash issued or paid in connection with the liquidation, reorganization,  refinancing, tender offer, merger, consolidation or recapitalization of any  corporation, or the exercise of any conversion privilege;

 

 

 

 

 

 

(v)

deliver any Securities held for a Portfolio to any protective committee, reorganization committee or other person in connection with the reorganization, refinancing, merger, consolidation, recapitalization or sale of assets of any corporation, and receive and hold under the terms of this Agreement such certificates of deposit, interim receipts or other instruments or documents as may be issued to it to evidence such delivery;

 

 

 

 

 

 

(vi)

make such transfer or exchanges of the assets of the Portfolios and take such other steps as shall be stated in said Oral Instructions or Written Instructions to be for the purpose of effectuating a duly authorized plan of liquidation, reorganization, merger, consolidation or recapitalization of the

14


 

 

 

Fund;

 

 

 

 

 

 

(vii)

release Securities belonging to a Portfolio to any bank or trust company for the purpose of a pledge or hypothecation to secure any loan incurred by the Fund on behalf of that Portfolio; provided, however, that Securities shall be released only upon payment to PFPC Trust of the monies borrowed, except that in cases where additional collateral is required to secure a borrowing already made subject to proper prior authorization, further Securities may be released for that purpose; and repay such loan upon redelivery to it of the Securities pledged or hypothecated therefor and upon surrender of the note or notes evidencing the loan;

 

 

 

 

 

 

(viii)

release and deliver Securities owned by a Portfolio in connection with any  repurchase agreement entered into by the Fund on behalf of that Portfolio, but only on receipt of payment therefor; and pay out monies of the Fund in connection with such repurchase agreements, but only upon the delivery of the Securities;

 

 

 

 

 

 

(ix)

release and deliver or exchange Securities owned by the Fund in  connection with any conversion of such Securities, pursuant to their terms, into other Securities;

 

 

 

 

 

 

(x)

release and deliver Securities to a broker in connection with the broker’s custody of margin collateral relating to futures and options transactions;

 

 

 

 

 

 

(xi)

release and deliver Securities owned by the Fund for the purpose of redeeming in kind shares of the Fund upon delivery thereof to PFPC Trust; and

 

 

 

 

 

 

(xii)

release and deliver or exchange Securities owned by the Fund for other purposes.

 

 

 

 

 

 

 

PFPC Trust must also receive a certified resolution describing the nature of the corporate purpose and the name and address of the person(s) to whom delivery shall be made when such action is pursuant to sub-paragraph d(xii).

 

 

 

 

 

(e)

Use of Book-Entry System or Other Depository .  PFPC Trust will deposit in Book-Entry Systems and other depositories all Securities belonging to the Portfolios eligible for deposit therein and will utilize Book-Entry Systems and other depositories to the extent possible in connection with settlements of

15


 

 

purchases and sales of Securities by the Portfolios, and deliveries and returns of Securities loaned, subject to repurchase agreements or used as collateral in connection with borrowings.  PFPC Trust shall continue to perform such duties until it receives Written Instructions or Oral Instructions authorizing contrary actions. Notwithstanding anything in this Agreement to the contrary, PFPC Trust’s use of a Book-Entry System shall comply with the requirements of Rule 17f-4 under the 1940 Act.

 

 

 

PFPC Trust shall administer a Book-Entry System or other depository as follows:

 

 

 

 

 

 

(i)

With respect to Securities of each Portfolio which are maintained in a Book-Entry System or another depository, the records of PFPC Trust shall identify by book-entry or otherwise those Securities as belonging to each Portfolio.

 

 

 

 

 

 

(ii)

Assets of each Portfolio deposited in a Book-Entry System or another depository will (to the extent consistent with applicable law and standard practice) at all times be segregated from any assets and cash controlled by PFPC Trust in other than a fiduciary or custodian capacity but may be commingled with other assets held in such capacities.

 

 

 

 

 

PFPC Trust will provide the Fund with such reports on its own system of internal control as the Fund may reasonably request from time to time.

 

 

 

 

 

(f)

Registration of Securities .  All Securities held for a Portfolio which are issued or issuable only in bearer form, except such Securities maintained in the Book-Entry System or in another depository, shall be held by PFPC Trust in bearer form; all other Securities maintained for a Portfolio may be registered in the name of the Fund on behalf of that Portfolio, PFPC Trust, a Book-Entry System, another depository, a sub-custodian, or any duly appointed nominee of the Fund, PFPC Trust, Book-Entry System, depository or sub-custodian.  The Fund reserves the

16


 

 

right to instruct PFPC Trust as to the method of registration and safekeeping of the Securities of the Fund.  The Fund agrees to furnish to PFPC Trust appropriate instruments to enable PFPC Trust to maintain or deliver in proper form for transfer, or to register in the name of its nominee or in the name of the Book-Entry System or in the name of another appropriate entity, any Securities which it may maintain for the Accounts.  With respect to uncertificated Securities. which are registered in the name of the Fund or a Portfolio (or a nominee thereof), PFPC Trust will reflect such Securities on its records based upon the holdings information provided to it by the issuer of such Securities, but notwithstanding anything in this Agreement to the contrary PFPC Trust shall not be obligated to safekeep such Securities or to perform other duties with respect to such Securities other than to make payment for the purchase of such Securities upon receipt o f Oral or Written Instructions, accept in sale proceeds received by PFPC Trust upon the sale of such Securities of which PFPC Trust is informed pursuant to Oral or Written Instructions, and accept in other distributions received by PFPC Trust with respect to such Securities or reflect on its records any reinvested distributions with respect to such Securities of which it is informed by the issuer of the Securities.

 

 

 

 

 

(g)

Voting and Other Action .  Neither PFPC Trust nor its nominee shall vote any of the Securities held pursuant to this Agreement by or for the account of a Portfolio, except in accordance with Written Instructions.  PFPC Trust, directly or through the use of another entity, shall execute in blank and promptly deliver all notices, proxies and proxy soliciting materials received by PFPC Trust as custodian of the

17


 

 

  Property to the registered holder of such Securities.  If the registered holder is not the Fund on behalf of a Portfolio, then Written Instructions or Oral Instructions must designate the person who owns such Securities.

 

 

 

 

  (h)

Transactions Not Requiring Instructions .  Notwithstanding anything in this Agreement requiring instructions in order to take a particular action, in the absence of a contrary Written Instruction, PFPC Trust is authorized to take the following actions without the need for instructions:

 

 

 

 

 

 

(i)

Collection of Income and Other Payments.

 

 

 

 

 

 

 

 

 

(A)

collect and receive for the account of each Portfolio, all income, dividends, distributions, coupons, option premiums, other payments and similar items, included or to be included in the Property, and, in addition, promptly advise each Portfolio of such receipt and credit such income to each Portfolio’s custodian account;

 

 

 

 

 

 

 

 

 

(B)

endorse and deposit for collection, in the name of the Fund, checks, drafts, or other orders for the payment of money;

 

 

 

 

 

 

 

 

 

(C)

receive and hold for the account of each Portfolio all Securities received as a distribution on the Portfolio’s Securities as a result of a stock dividend, share split-up or reorganization, recapitalization, readjustment or other rearrangement or distribution of rights or similar Securities issued with respect to any Securities belonging to a Portfolio and held by PFPC Trust hereunder;

 

 

 

 

 

 

 

 

 

(D)

present for payment and collect the amount payable upon all Securities which may mature or be called, redeemed, retired or otherwise become payable (on a mandatory basis) on the date such Securities become payable; and

 

 

 

 

 

 

 

 

 

(E)

take any action which may be necessary and proper in connection with the collection and receipt of such income and other payments and the endorsement for collection of checks, drafts, and other negotiable instruments.

 

 

 

 

 

 

 

 

(ii)

Miscellaneous Transactions .

18


 

 

 

(A)

PFPC Trust is authorized to deliver or cause to be delivered Property against payment or other consideration or written receipt therefor in the following cases:

 

 

 

 

 

 

 

 

 

 

(1)

for examination by a broker or dealer selling for the  account of a Portfolio in accordance with street delivery custom;

 

 

 

 

 

 

 

 

 

 

(2)

for the exchange of interim receipts or temporary Securities for definitive Securities; and

 

 

 

 

 

 

 

 

 

 

(3)

for transfer of Securities into the name of the Fund on behalf of a Portfolio or PFPC Trust or a sub-custodian or a nominee of one of the foregoing, or for exchange of Securities for a different number of bonds, certificates, or other evidence, representing the same aggregate face amount or  number of units bearing the same interest rate, maturity date and call provisions, if any; provided that, in any such case, the new Securities are to be delivered to PFPC Trust.

 

 

 

 

 

 

 

 

 

(B)

PFPC Trust shall:

 

 

 

 

 

 

 

 

 

 

(1)

pay all income items held by it which call for payment upon presentation and hold the cash received by it upon such payment for the account of each Portfolio;

 

 

 

 

 

 

 

 

 

 

(2)

collect interest and cash dividends received, with notice to the Fund, to the account of each Portfolio;

 

 

 

 

 

 

 

 

 

 

(3)

hold for the account of each Portfolio all stock dividends, rights and similar Securities issued with respect to any Securities held by PFPC Trust; and

 

 

 

 

 

 

 

 

 

 

(4)

subject to receipt of such documentation and information as PFPC Trust may request, execute as agent on behalf of the Fund all necessary ownership certificates required by a national governmental taxing authority or under the laws of any U.S. state now or hereafter in effect, inserting the Fund’s name, on behalf of a Portfolio, on such certificate as the owner of the Securities covered thereby, to the extent it may lawfully do so.

 

 

 

 

 

 

 

 

(iii)

Other Matters .

19


 

 

 

(A)

Subject to receipt of such documentation and information as PFPC Trust may request, PFPC Trust will, in such jurisdictions as PFPC Trust may agree from time to time, seek to reclaim or obtain a reduction with respect to any withholdings or other taxes relating to assets maintained hereunder (provided that PFPC Trust will not be liable for failure to obtain any particular relief in a particular jurisdiction); and

 

 

 

 

 

 

 

 

(B)

PFPC Trust is authorized to deduct or withhold any sum in respect of tax which PFPC Trust considers is required to be deducted or withheld “at source” by any relevant law or practice.

 

 

 

 

 

 

(i)

Segregated Accounts .

 

 

 

 

 

 

 

(i)

PFPC Trust shall upon receipt of Written Instructions or Oral Instructions establish and maintain segregated accounts on its records for and on behalf of each Portfolio.  Such accounts may be used to transfer cash and Securities, including Securities in a Book-Entry System or other depository:

 

 

 

 

 

 

 

 

(A)

for the purposes of compliance by the Fund with the procedures required by a Securities or option exchange, providing such procedures comply with the 1940 Act and any releases of the SEC relating to the maintenance of segregated accounts by registered investment companies; and

 

 

 

 

 

 

 

 

(B)

upon receipt of Written Instructions, for other purposes.

 

 

 

 

 

 

 

(ii)

PFPC Trust shall arrange for the establishment of IRA custodian accounts for such shareholders holding Shares through IRA accounts, in accordance with the Fund’s prospectuses, the Internal Revenue Code of 1986, as amended (including regulations promulgated thereunder), and with such other procedures as are mutually agreed upon from time to time by and among the Fund, PFPC Trust and the Fund’s transfer agent.

 

 

 

 

 

 

(j)

Purchases of Securities .  PFPC Trust shall settle purchased Securities upon receipt of Oral Instructions or Written Instructions that specify:

 

 

 

 

 

 

 

(i)

the name of the issuer and the title of the Securities, including CUSIP number if applicable;

 

 

 

 

 

 

 

(ii)

the number of shares or the principal amount purchased and accrued interest, if any;

20


 

 

(iii)

the date of purchase and settlement;

 

 

 

 

 

 

 

(iv)

the purchase price per unit;

 

 

 

 

 

 

 

(v)

the total amount payable upon such purchase;

 

 

 

 

 

 

 

(vi)

the Portfolio involved; and

 

 

 

 

 

 

 

(vii)

the name of the person from whom or the broker through whom the purchase was made.  PFPC Trust shall upon receipt of Securities purchased by or a Portfolio (or otherwise in accordance with standard market practice) pay out of the monies held for the account of the Portfolio the total amount payable to the person from whom or the broker through whom the purchase was made, provided that the same conforms to the total amount payable as set forth in such Oral Instructions or Written Instructions.

 

 

 

 

 

 

(k)

Sales of Securities .  PFPC Trust shall settle sold Securities upon receipt of Oral Instructions or Written Instructions that specify:

 

 

 

 

 

 

 

(i)

the name of the issuer and the title of the security, including CUSIP number if applicable;

 

 

 

 

 

 

 

(ii)

the number of shares or principal amount sold, and accrued interest, if any;

 

 

 

 

 

 

(iii)

the date of trade and settlement;

 

 

 

 

 

 

(iv)

the sale price per unit;

 

 

 

 

 

 

(v)

the total amount payable to the Fund upon such sale;

 

 

 

 

 

 

(vi)

the name of the broker through whom or the person to whom the sale was made;

 

 

 

 

 

 

(viii)

the location to which the security must be delivered and delivery deadline, if any; and

 

 

 

 

 

 

(ix)

the Portfolio involved.

 

 

 

 

 

 

PFPC Trust shall deliver the Securities upon receipt of the total amount payable to the  Portfolio upon such sale, provided that the total amount payable is the same as was set forth in the Oral Instructions or Written Instructions.  Notwithstanding anything to the

21


 

contrary in this Agreement, PFPC Trust may accept payment in such form as is consistent with standard industry practice and may deliver assets and arrange for payment in accordance with standard market practice.

 

 

 

 

 

 

(l)

Reports; Proxy Materials .

 

 

 

 

 

 

 

(i)

PFPC Trust shall furnish to the Fund the following reports:

 

 

 

 

 

 

 

 

(A)

such periodic and special reports as the Fund may reasonably request;

 

 

 

 

 

 

 

 

(B)

a monthly statement summarizing all transactions and entries for the account of each Portfolio, listing each portfolio security belonging to each Portfolio (with the corresponding security identification number) held at the end of such month and stating the cash balance of each Portfolio at the end of such month.

 

 

 

 

 

 

 

 

(C)

the reports required to be furnished to the Fund pursuant to Rule 17f-4 of the 1940 Act; and

 

 

 

 

 

 

 

 

(D)

such other information as may be agreed upon from time to time between the Fund and PFPC Trust.

 

 

 

 

 

 

 

(ii)

PFPC Trust shall transmit promptly to the Fund any proxy statement, proxy material, notice of a call or conversion or similar communication received by it as custodian of the Property.  PFPC Trust shall be under no other obligation to inform the Fund as to such actions or events. For clarification, upon termination of this Agreement PFPC Trust shall have no responsibility to transmit such material or to inform the Fund or any other person of such actions or events.

 

 

 

 

 

 

(m)

Crediting of Accounts . PFPC Trust may in its sole discretion credit an Account with respect to income, dividends, distributions, coupons, option premiums, other payments or similar items prior to PFPC Trust’s actual receipt thereof, and in addition PFPC Trust may in its sole discretion credit or debit the assets in an Account on a contractual settlement date with respect to any sale, exchange or purchase applicable to the Account; provided that nothing herein or otherwise shall require PFPC Trust to make any advances or to credit any amounts until PFPC Trust’s actual receipt thereof.  If PFPC Trust credits an Account with respect to (a) income, dividends, distributions, coupons, option premiums, other payments or similar items on a contractual payment date or otherwise in advance of PFPC Trust’s actual receipt of the amount due, (b) the proceeds of any sale or

22


 

 

addition PFPC Trust may in its sole discretion credit or debit the assets in an Account on a contractual settlement date with respect to any sale, exchange or purchase applicable to the Account; provided that nothing herein or otherwise shall require PFPC Trust to make any advances or to credit any amounts until PFPC Trust’s actual receipt thereof.  If PFPC Trust credits an Account with respect to (a) income, dividends, distributions, coupons, option premiums, other payments or similar items on a contractual payment date or otherwise in advance of PFPC Trust’s actual receipt of the amount due, (b) the proceeds of any sale or other disposition of assets on the contractual settlement date or otherwise in advance of PFPC Trust’s actual receipt of the amount due or (c) provisional crediting of any amounts due, and (i) PFPC Trust is subsequently unable to collect full and final payment for the amounts so credited within a reasonable time period usi ng reasonable efforts or (ii) pursuant to standard industry practice, law or regulation PFPC Trust is required to repay to a third party such amounts so credited, or if any Property has been incorrectly credited, PFPC Trust shall have the absolute right in its sole discretion without demand to reverse any such credit or payment, to debit or deduct the amount of such credit or payment from the Account, and to otherwise pursue recovery of any such amounts so credited from the Fund. The Fund hereby grants to PFPC Trust and to each sub-custodian utilized by PFPC Trust in connection with providing services to the Fund a first priority contractual possessory security interest in and a right of setoff against the assets maintained in an Account hereunder in the amount necessary to secure the return and payment to PFPC Trust and to each such sub-custodian of any advance

23


 

 

or credit made by PFPC Trust and/or by such sub-custodian (including charges related thereto) to such Account.  Notwithstanding anything in this Agreement to the contrary, PFPC Trust shall be entitled to assign any rights it has under this sub-section (m) to any sub-custodian utilized by PFPC Trust in connection with providing services to the Fund which sub-custodian makes any credits or advances with respect to the Fund.

 

 

 

 

(n)

Collections .  All collections of monies or other property in respect, or which are to become part, of the Property (but not the safekeeping thereof upon receipt by PFPC Trust) shall be at the sole risk of the Fund.  If payment is not received by PFPC Trust within a reasonable time after proper demands have been made, PFPC Trust shall notify the Fund in writing, including copies of all demand letters, any written responses and memoranda of all oral responses and shall await instructions from the Fund.  PFPC Trust shall not be obliged to take legal action for collection unless and until reasonably indemnified to its satisfaction.  PFPC Trust shall also notify the Fund as soon as reasonably practicable whenever income due on Securities is not collected in due course and shall provide the Fund with periodic status reports of such income collected after a reasonable time.

 

 

 

 

 

 

 

(o)

Excess Cash Sweep . PFPC Trust will, consistent with applicable law, sweep any net excess cash balances daily into an investment vehicle or other instrument designated in Written Instructions, so long as the investment vehicle or instrument is acceptable to PFPC Trust, subject to a fee, paid to PFPC Trust for such service, to be agreed between the parties. Such investment vehicle or instrument may be offered by an affiliate of PFPC Trust or by a PFPC Trust client and PFPC Trust

24


 

 

  may receive compensation therefrom.

 

 

 

 

(p)

Foreign Exchange . PFPC Trust and/or sub-custodians may enter into or arrange foreign exchange transactions (at such rates as they may consider appropriate) in order to facilitate transactions under this Agreement, and such entities and/or their affiliates may receive compensation in connection with such foreign exchange transactions.

15.

Duration and Termination .   This Agreement shall continue until terminated by the Fund or PFPC Trust on sixty (60) days’ prior written notice to the other party. In the event this Agreement is terminated (pending appointment of a successor to PFPC Trust or vote of the shareholders of the Fund to dissolve or to function without a custodian of its cash, Securities or other property), PFPC Trust shall not deliver cash, Securities or other property of the Find to the Fund.  It may deliver them to a bank or trust company of PFPC Trust’s choice, having aggregate capital, surplus and undivided profits, as shown by its last published report, of not less than twenty million dollars ($20,000,000), as a custodian for the Fund to be held under terms similar to those of this Agreement.  PFPC Trust shall not be required to make any delivery or payment of assets upon termination until full payment shall have been made to PFPC Trust of all of its fees, compensation, costs and expenses (including without limitation fees and expenses associated with deconversion or conversion to another service provider and other trailing expenses incurred by PFPC Trust).  PFPC Trust shall have a first priority contractual possessory security interest in and shall have a right of setoff against the Property as security for the payment of such fees, compensation, costs and expenses.

 

 

 

 

 

 

16.

Notices .   Notices shall be addressed (a) if to PFPC Trust at 8800 Tinicum Boulevard, 3 rd

25


 

Floor, Philadelphia, Pennsylvania 19153, Attention:  Sam Sparhawk (or such other address as PFPC Trust may inform the Fund in writing);  (b) if to the Fund, at _____________, Attention: __________; or (c) if to neither of the foregoing, at such other address as shall have been given by like notice to the sender of any such notice or other communication by the other party.  If notice is sent by confirming telegram, cable, telex or facsimile sending device, it shall be deemed to have been given immediately.  If notice is sent by first-class mail, it shall be deemed to have been given three days after it has been mailed.  If notice is sent by messenger, it shall be deemed to have been given on the day it is delivered.

 

 

 

 

 

 

17.

Amendments .   This Agreement, or any term thereof, may be changed or waived only by a written amendment, signed by the party against whom enforcement of such change or waiver is sought.

 

 

 

 

 

 

18.

Delegation; Assignment . PFPC Trust may assign its rights and delegate its duties hereunder to any affiliate of PFPC Trust or of The PNC Financial Services Group, Inc., provided that PFPC Trust gives the Fund thirty (30) days’ prior written notice of such assignment or delegation.

 

 

 

 

 

 

19.

Counterparts .   This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

 

 

 

20.

Miscellaneous .

 

 

 

 

 

 

 

 

(a)

Entire Agreement .  This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties may

26


 

 

embody in one or more separate documents their agreement, if any, with respect to delegated duties and Oral Instructions.

 

 

 

 

 

 

 

(b)

Captions .  The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.

 

 

 

 

 

 

 

(c)

Information . The Fund will provide such information and documentation as PFPC Trust may reasonably request in connection with services provided by PFPC Trust to the Fund.

 

(d)

Governing Law .  This Agreement shall be deemed to be a contract made in Delaware and governed by Delaware law, without regard to principles of conflicts of law.

 

 

 

 

 

 

 

(e)

Partial Invalidity .  If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.

 

 

 

 

 

 

 

(f)

Successors and Assigns .  This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.

 

 

 

 

 

 

 

(g)

Facsimile Signatures .  The facsimile signature of any party to this Agreement shall constitute the valid and binding execution hereof by such party.

 

 

 

 

 

 

 

(h)

Customer Identification Program Notice . To help the U.S. government fight the funding of terrorism and money laundering activities, U.S. Federal law requires each financial institution to obtain, verify, and record certain information that identifies each person who initially opens an account with that financial institution on or after October 1, 2003. Consistent with this requirement, PFPC Trust may request (or may have already requested) the Fund’s name, address and taxpayer identification number or other government-issued identification number, and, if such party is a natural person, that party’s date of birth. PFPC Trust may also ask (and may have already asked) for additional identifying information, and PFPC Trust may take steps (and may have already taken steps) to verify the authenticity and accuracy of these data elements.

27


 

 

on or after October 1, 2003. Consistent with this requirement, PFPC Trust may request (or may have already requested) the Fund’s name, address and taxpayer identification number or other government-issued identification number, and, if such party is a natural person, that party’s date of birth. PFPC Trust may also ask (and may have already asked) for additional identifying information, and PFPC Trust may take steps (and may have already taken steps) to verify the authenticity and accuracy of these data elements.

28


          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.

 

 

PFPC TRUST COMPANY

 

 

 

 

 

 

By:

 

 

 

 

 

 

 

 

 

 

Title:

 

 

 

 

 

 

 

 

 

 

HIGHLAND FUNDS I

 

 

 

 

 

 

By:

 

 

 

 

 

 

Title:

 

 

 

 

 

29

ACCOUNTING SERVICES AGREEMENT

          THIS AGREEMENT is made as of ___________, 2006 by and between HIGHLAND FUNDS I, a Delaware statutory trust (the “Fund”), and PFPC INC., a Massachusetts corporation (“PFPC”).

W I T N E S S E T H :

          WHEREAS, the Fund is registered as an open-end, non-diversified management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”); and

          WHEREAS, the Fund wishes to retain PFPC to provide accounting services to its investment portfolios listed on Exhibit A attached hereto and made a part hereof, as such Exhibit A may be amended from time to time (each a “Portfolio”), and PFPC wishes to furnish such services.

          NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows:

1.

Definitions.  As Used in this Agreement

 

 

 

 

(a)

“1933 Act” means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder.

 

 

 

 

(b)

“1934 Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder.

 

 

 

 

(c)

“1940 Act” has the meaning set forth in the recitals hereof and includes the rules and regulations of the SEC promulgated thereunder.

1


 

(d)

“Authorized Person” means any officer of the Fund and any other person duly authorized by the Fund’s Board of Trustees to give Oral Instructions or Written Instructions on behalf of the Fund and listed on the Authorized Persons Appendix attached hereto and made a part hereof or any amendment thereto as  may be received by PFPC.  An Authorized Person’s scope of authority may be limited by the Fund by setting forth such limitation in the Authorized Persons Appendix.

 

 

 

 

(e)

“Board of Trustees” and “Shareholders” shall have the same meanings as used in the Fund’s organizational documents.

 

 

 

 

(f)

“Oral Instructions” mean oral instructions received by PFPC from an Authorized Person or from a person reasonably believed by PFPC to be an Authorized Person.

 

 

 

 

(g)

“SEC”   means the Securities and Exchange Commission.

 

 

 

 

(h)

“Securities Laws” mean the 1933 Act, the 1934 Act and the 1940 Act.

 

 

 

 

(i)

“Shares” mean the Fund’s shares of beneficial interest.

 

 

 

 

(j)

“Written Instructions” mean (i) written instructions signed by an Authorized Person and received by PFPC or (ii) trade instructions transmitted (and received by PFPC) by means of an electronic transaction reporting system, access to which requires use of a password or other authorized identifier.  The instructions may be delivered by hand, mail, tested telegram, cable, telex or facsimile sending device.

 

 

2 .

Appointment .  The Fund hereby appoints PFPC to provide accounting services to each of the Portfolios, in accordance with the terms set forth in this Agreement.  PFPC accepts such appointment and agrees to furnish such services.

   

3 .

Compliance with Rules and Regulations.

2


 

PFPC agrees to comply with the applicable requirements of the Securities Laws, and any laws, rules and regulations of governmental authorities having jurisdiction with respect to the duties to be performed by PFPC hereunder.  Except as specifically set forth herein, PFPC assumes no responsibility for such compliance by the Fund.

 

 

4.

Instructions.

 

 

 

 

(a)

Unless otherwise provided in this Agreement, PFPC shall act only upon Oral Instructions or Written Instructions, including standing Written Instructions related to ongoing instructions received electronically.

 

 

 

 

(b)

PFPC shall be entitled to rely upon any Oral Instructions or Written Instructions it receives from an Authorized Person (or from a person reasonably believed by PFPC to be an Authorized Person) pursuant to this Agreement.  PFPC may assume that any Oral Instruction or Written Instruction received hereunder is not in any way inconsistent with the provisions of organizational documents or this Agreement or of any vote, resolution or proceeding of the Fund’s Board of Trustees or of the Fund’s Shareholders, unless and until PFPC receives Written Instructions to the contrary.

 

 

 

 

(c)

The Fund agrees to forward to PFPC Written Instructions confirming Oral Instructions (except where such Oral Instructions are given by PFPC or its affiliates) and shall endeavor to ensure that PFPC receives the Written Instructions by the close of business on the same day that such Oral Instructions are received.  The fact that such confirming Written Instructions are not received by PFPC shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions. Where Oral Instructions or

3


 

 

Written Instructions reasonably appear to have been received from an Authorized Person, PFPC shall incur no liability to the Fund in acting upon such Oral Instructions or Written Instructions provided that PFPC’s actions comply with the  other provisions of this Agreement.

 

 

 

5.

Right to Receive Advice.

 

 

 

 

(a)

Advice of the Fund .  If PFPC is in doubt as to any action it should or should not take, PFPC may request directions or advice, including Oral Instructions or Written Instructions, from the Fund.

 

 

 

 

(b)

Advice of Counsel .  If PFPC shall be in doubt as to any question of law pertaining to any action it should or should not take, PFPC may request advice at its own cost from such counsel of its own choosing (who may be counsel for the Fund, the Fund’s investment adviser or PFPC, at the option of PFPC).

 

 

 

 

(c)

Conflicting Advice .  In the event of a conflict between directions, advice or Oral Instructions or Written Instructions PFPC receives from the Fund, and the advice it receives from counsel, PFPC shall be entitled to rely upon and follow the advice of  counsel, provided that such counsel is selected with reasonable care. PFPC shall promptly inform the Fund of such conflict and PFPC shall refrain from acting in the event of a conflict unless counsel advises PFPC that a failure to take action is likely to result in additional loss, liability or expense. In the event PFPC relies on the advice of counsel, PFPC remains liable for any action or omission on the part of PFPC which constitutes willful misfeasance, bad faith, gross negligence or reckless disregard by PFPC of any duties, obligations or responsibilities set forth in this Agreement.

4


 

(d)

Protection of PFPC .  PFPC shall be protected in any action it takes or does not take in reliance upon directions, advice or Oral Instructions or Written Instructions it receives from the Fund or (to the extent permitted under clause (c) above) from counsel and which PFPC believes, in good faith, to be consistent with those directions, advice or Oral Instructions or Written Instructions.  Nothing in this section shall be construed so as to impose an obligation upon PFPC (i) to seek such directions, advice or Oral Instructions or Written Instructions, or (ii) to act in accordance with such directions, advice or Oral Instructions or Written Instructions unless, under the terms of other provisions of this Agreement, the same is a condition of PFPC’s properly taking or not taking such action. Nothing in this subsection shall excuse PFPC when an action or omission on the part of PFPC constitutes willful misfeasance, bad faith, negligence or reckless disregard by PFPC of any duties, obligations or responsibilities set forth in this Agreement.

 

 

 

6.

Records; Visits .

 

 

 

(a)

The books and records pertaining to the Fund and the Portfolios, which are in the possession or under the control of PFPC, shall be the property of the Fund. Such books and records shall be prepared, preserved and maintained as required by the 1940 Act and other applicable securities laws, rules and regulations.  The Fund and its duly authorized officers, employees and agents and the staff of the SEC shall have access to such books and records at all times during PFPC’s normal business hours.  Upon the reasonable request of the Fund, copies of any such books and records shall be provided by PFPC to the Fund or to an Authorized Person, at the Fund’s expense.  Any such books and records may be maintained in

5


    the form of electronic media and stored on any magnetic disk or tape or similar recording method.
     

 

(b)

PFPC shall keep the following records:


 

 

(i)

all books and records with respect to each Portfolio’s books of account; and

 

 

 

 

 

 

(ii)

records of each Portfolio’s securities transactions.


7.

Confidentiality.

 

 

 

Each party shall keep confidential any information relating to the other party’s business  (“Confidential Information”).  Confidential Information shall include (a) any data or information that is competitively sensitive material, and not generally known to the public, including, but not limited to, information about product plans, marketing strategies, finances, operations, customer relationships, customer profiles, customer lists, sales estimates, business plans, and internal performance results relating to the past, present or future business activities of the Fund or PFPC, their respective subsidiaries and affiliated companies and the customers, clients and suppliers of any of them; (b) any scientific or technical information, design, process, procedure, formula, or improvement that is commercially valuable and secret in the sense that its confidentiality affords the Fund or PFPC a competitive advantage over its competitors; (c) all confidential or proprietary concepts, documentation, reports, data, specifications, computer software, source code, object code, flow charts, databases, inventions, know-how, and trade secrets, whether or not patentable or copyrightable; and (d) anything designated as confidential. Notwithstanding the foregoing, information shall not be subject to such confidentiality obligations if it: (a) is already known to the receiving party at the time it is obtained; (b) is

6


 

or becomes publicly known or available through no wrongful act of the receiving party; (c) is rightfully received from a third party who, to the best of the receiving party’s knowledge, is not under a duty of confidentiality; (d) is released by the protected party to a third party without restriction; (e) is required to be disclosed by the receiving party pursuant to a requirement of a court order, subpoena, governmental or regulatory agency or law (provided the receiving party will provide the other party written notice of such requirement, to the extent such notice is permitted); (f) is relevant to the defense of any claim or cause of action asserted against the receiving party; (g) is Fund information provided by PFPC in connection with an independent third party compliance or other review; or (h) has been or is independently developed or obtained by the receiving party.

 

 

8.

Liaison with Accountants .  PFPC shall act as liaison with the Fund’s independent public accountants and shall provide account analyses, fiscal year summaries, and other audit-related schedules with respect to each Portfolio.  PFPC shall take all reasonable action in the performance of its obligations under this Agreement to ensure that the necessary information is made available to such independent public accountants as reasonably requested by the Fund.

 

 

9.

PFPC System .  PFPC shall retain title to and ownership of any and all data bases, computer programs, screen formats, report formats, interactive design techniques, derivative works, inventions, discoveries, patentable or copyrightable matters, concepts, expertise, patents, copyrights, trade secrets, and other related legal rights utilized by PFPC in connection with the services provided by PFPC to the Fund.

   

10.

Disaster Recovery .  PFPC shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provisions for emergency use of

7


 

electronic data processing equipment.  In the event of equipment failures, PFPC shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions.  PFPC shall have no liability with respect to the loss of data or service interruptions caused by equipment failure, provided such loss or interruption is not caused by PFPC’s own willful misfeasance, bad faith, negligence or reckless disregard of its duties or obligations under this Agreement.

 

 

11.

Compensation.

 

 

 

(a)

As compensation for services rendered by PFPC during the term of this Agreement, the Fund, on behalf of each Portfolio, will pay to PFPC a fee or fees as may be agreed to from time to time in writing by the Fund and PFPC.

 

 

 

 

(b)

The undersigned hereby represents and warrants to PFPC that (i) the terms of this Agreement, and (ii) the fees and expenses associated with this Agreement have been approved by the Board of Trustees of the Fund to the extent required by applicable law.

 

 

 

12.

Indemnification.

 

 

 

(a)

The Fund, on behalf of each Portfolio, agrees to indemnify, defend and hold harmless PFPC and its affiliates from all taxes, charges, expenses, assessments, claims and liabilities (including without limitation reasonable attorneys’ fees and disbursements and liabilities arising under the Securities Laws and any state and foreign securities and blue sky laws) (collectively, “Losses”) arising directly or indirectly from any action or omission to act which PFPC takes (i) at the request or on the direction of or in reliance on the advice of the Fund or (ii) upon Oral Instructions or Written Instructions; provided , however , neither PFPC nor any of

8


 

 

its affiliates, shall be indemnified against any liability (or any expenses incident to such liability) arising out of PFPC’s or its affiliates’ own willful misfeasance, bad faith, negligence or reckless disregard of its duties and obligations under this Agreement.

 

 

 

(b)

Notwithstanding anything in this Agreement to the contrary, the Fund shall not be liable to PFPC or its affiliates for any consequential, special or indirect losses or damages which PFPC or its affiliates may incur or suffer as a consequence of this Agreement, whether or not the likelihood of such damages or losses was known by the Fund.

 

 

13.

Responsibility of PFPC .

 

 

 

(a)

PFPC shall be under no duty to take any action on behalf of the Fund or any Portfolio except as necessary to fulfill its duties and obligations as specifically set forth herein or as may be specifically agreed to by PFPC in writing.  PFPC shall be obligated to exercise care and diligence in the performance of its duties hereunder and to act in good faith and to use its best efforts, within reasonable limits, in performing services provided for under this Agreement.  PFPC agrees to indemnify and hold harmless the Fund from Losses arising out of PFPC’s failure to perform its duties under this Agreement to the extent such damages arise out of PFPC’s willful misfeasance, bad faith, negligence or reckless disregard of such duties.

     

 

(b)

Without limiting the generality of the foregoing or of any other provision of this Agreement, (i) PFPC shall not be liable for losses beyond its control, provided that PFPC has acted in accordance with the standard of care set forth above; and

9


 

 

(ii) PFPC shall not be liable for (A) the validity or invalidity or authority or lack thereof of any Oral Instruction or Written Instruction, notice or other instrument which conforms to the applicable requirements of this Agreement and which PFPC reasonably believes to be genuine; or (B) subject to Section 10, delays or errors or loss of data occurring by reason of circumstances beyond PFPC’s control, including acts of civil or military authority, national emergencies, labor difficulties, fire, flood, catastrophe, acts of God, insurrection, war, riots or failure of the mails, transportation, communication or power supply.

 

 

 

 

(c)

Notwithstanding anything in this Agreement to the contrary, neither PFPC nor its affiliates shall be liable to the Fund for any consequential, special or indirect losses or damages which the Fund may incur or suffer by or as a consequence of PFPC’s or its affiliates’ performance of the services provided hereunder, whether or not the likelihood of such losses or damages was known by PFPC or its affiliates.

 

 

 

14.

Description of Accounting Services on a Continuous Basis .


 

PFPC will perform the following accounting services with respect to each Portfolio:

 

 

 

 

 

 

(i)

Journalize investment, capital and income and expense activities;

 

 

 

 

 

 

(ii)

Verify investment buy/sell trade tickets when received from the investment adviser for a Portfolio (the “Adviser”);

 

 

 

 

 

 

(iii)

Maintain individual ledgers for investment securities;

 

 

 

 

 

 

(iv)

Maintain historical tax lots for each security;

 

 

 

 

 

 

(v)

Record and reconcile corporate action activity and all other capital changes;

 

 

 

 

 

 

(vi)

Reconcile cash and investment balances with the Fund’s custodian(s), and

10


 

 

 

provide the Adviser with the beginning cash balance available for investment purposes;

 

 

 

 

 

 

(vii)

Update the cash availability throughout the day as required by the Adviser;

 

 

 

 

 

 

(viii)

Calculate contractual expenses, including management fees, as applicable, in accordance with the Fund’s prospectus;

 

 

 

 

 

 

(ix)

Post to and prepare the Statement of Assets and Liabilities and the Statement of Operations in U.S. dollar terms;

 

 

 

 

 

 

(x)

Monitor the expense accruals and notify an officer of the Fund of any proposed adjustments;

 

 

 

 

 

 

(xi)

Control all disbursements and authorize such disbursements from the Fund’s account with the custodian(s) upon Written Instructions;

 

 

 

 

 

 

(xii)

Calculate capital gains and losses;

 

 

 

 

 

 

(xiii)

Determine net income;

 

 

 

 

 

 

(xiv)

Determine applicable foreign exchange gains and losses on payables and receivables;

 

 

 

 

 

 

(xv)

Obtain monthly security market quotes and currency exchange rates from independent pricing sources approved by the Adviser, or if such quotes are unavailable, then obtain such prices from the Adviser, and in either case calculate the market value of each Portfolio’s investments in accordance with the applicable valuation policies or guidelines provided by the Fund to PFPC and acceptable to PFPC;

 

 

 

 

 

 

(xvi)

Transmit a copy of the monthly portfolio valuation to the Adviser;

 

 

 

 

 

 

(xvii)

Compute net asset value; and

 

 

 

 

 

 

(xviii)

As appropriate, compute yields, total return, expense ratios, portfolio turnover rate, and, if required, portfolio average dollar weighted maturity.


15.

Duration and Termination .  This Agreement shall continue until terminated by the Fund or by PFPC on sixty (60) days’ prior written notice to the other party.  In the event the Fund gives notice of termination, all expenses associated with movement (or duplication) of records and materials and conversion thereof to a successor accounting

11


 

services agent (and any other service provider(s)), and all trailing expenses incurred by PFPC, will be borne by the Fund.

 

 

16.

Notices . Notices shall be addressed (a) if to PFPC, at 301 Bellevue Parkway, Wilmington, Delaware 19809, Attention: General Counsel; (b) if to the Fund, at ________________, Attention:  _____________ of the foregoing, at such other address as shall have been given by like notice to the sender of any such notice by the other party.  If notice is sent by confirming telegram, cable, telex or facsimile sending device, it shall be deemed to have been given immediately.  If notice is sent by first-class mail, it shall be deemed to have been given three days after it has been mailed.  If notice is sent by messenger, it shall be deemed to have been given on the day it is delivered.

 

 

17.

Amendments .  This Agreement, or any term thereof, may be changed or waived only by a written amendment, signed by the party against whom enforcement of such change or waiver is sought.

 

 

18.

Delegation; Assignment; Sub-Contracting .  This Agreement and the rights and duties of the parties herein may not be assigned or delegated by any party without the written consent of each party, except that PFPC may assign or delegate its duties to any majority-owned direct or indirect subsidiary of PFPC or of The PNC Financial Services Group, Inc. upon thirty (30) days prior written notice to the Fund.

 

 

19.

Counterparts .  This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

 

 

20.

Further Actions .  Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof.

12


21.

Miscellaneous.

 

 

 

(a)

Entire Agreement .  This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties may embody in one or more separate documents their agreement, if any, with respect to delegated duties and Oral Instructions.

 

 

 

 

(b)

Captions .  The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.

 

 

 

 

(c)

Governing Law .  This Agreement shall be deemed to be a contract made in Delaware and governed by Delaware law, without regard to principles of conflicts of law.

 

 

 

 

(d)

Partial Invalidity .  If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.

 

 

 

 

(e)

Successors and Assigns .  This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.

 

 

 

 

(f)

Facsimile Signatures .  The facsimile signature of any party to this Agreement shall constitute the valid and binding execution hereof by such party.

 

 

 

 

(g)

The Fund will provide such information and documentation as PFPC may reasonably request in connection with services provided by PFPC to the Fund.

 

 

 

 

(h)

To help the U.S. government fight the funding of terrorism and money laundering

13


 

 

activities, U.S. Federal law requires each financial institution to obtain, verify, and record certain information that identifies each person who initially opens an account with that financial institution on or after October 1, 2003. Certain of PFPC and certain of its affiliates are financial institutions, and PFPC may, as a matter of policy, request (or may have already requested) the Fund’s name, address and taxpayer identification number or other government-issued identification number, and, if such party is a natural person, that party’s date of birth. PFPC may also ask (and may have already asked) for additional identifying information, and PFPC may take steps (and may have already taken steps) to verify the authenticity and accuracy of these data elements.

 

 

 

 

(i)

Notwithstanding any provision hereof, the services of PFPC are not, nor shall they be, construed as constituting legal advice or the provision of legal services for or on behalf of the Fund or any other person.

14


          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.

 

PFPC INC.

 

 

 

 

By:

 

 

 

 

 

 

 

Title:

 

 

 

 

 

 

 

HIGHLAND FUNDS I

 

 

 

 

By:

 

 

 

 

 

 

 

Title:

 

 

 

15


AUTHORIZED PERSONS APPENDIX

NAME (Type)

SIGNATURE

16


EXHIBIT A

          THIS EXHIBIT A, dated as of _________, 2006 is Exhibit A to that certain Accounting Services Agreement dated as of ________, 2006 between PFPC Inc. and Highland Fund I.

PORTFOLIOS

HIGHLAND EQUITY OPPORTUNITIES FUND

17

ADMINISTRATION SERVICES AGREEMENT

          THIS AGREEMENT is made as of ____________, 2006 by and between HIGHLAND CAPITAL MANAGEMENT, L.P., a Delaware limited partnership (“Highland”), and HIGHLAND FUNDS I, a Delaware statutory trust (the “Fund”).

W I T N E S S E T H :

          WHEREAS, the Fund is registered as an open-end, non-diversified management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”); and

          WHEREAS, the Fund wishes to retain Highland to provide administration services provided for herein to the Fund’s investment portfolios listed on Exhibit A attached hereto and made a part hereof, as such Exhibit A may be amended from time to time (each a “Portfolio”), and Highland wishes to furnish such services.

          NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows:

1.

Definitions.

 

 

 

(a)

“1933 Act” means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder.

 

 

 

 

(b)

“1934 Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder.

 

 

 

 

(c)

“1940 Act” means the Investment Company Act of 1940, as amended, and the rules and regulations of the SEC promulgated thereunder.


 

(d)

“Authorized Person” means any officer of the Fund and any other person duly authorized by the Fund’s Board of Trustees to give Oral Instructions or Written Instructions on behalf of the Fund and listed on the Authorized Persons Appendix attached hereto and made a part hereof or any amendment thereto as may be received by Highland.  An Authorized Person’s scope of authority may be limited by the Fund by setting forth such limitation in the Authorized Persons Appendix.

 

 

 

 

(e)

“Board of Trustees” and “Shareholders” shall have the same meanings as used in the Fund’s Agreement and Declaration of Trust.

 

 

 

 

(f)

“Declaration” means the Fund’s Agreement and Declaration of Trust, as amended from time to time.

 

 

 

 

(g)

“Oral Instructions” mean oral instructions received by Highland from an Authorized Person or from a person reasonably believed by Highland to be an Authorized Person.

 

 

 

 

(h)

“SEC” means the Securities and Exchange Commission.

 

 

 

 

(i)

“Securities Laws” mean the 1933 Act, the 1934 Act and the 1940 Act.

 

 

 

 

(j)

“Shares” means the Fund’s shares of beneficial interest.

 

 

 

 

(k)

“Written Instructions” mean (i) written instructions signed by an Authorized Person and received by Highland or (ii) trade instructions transmitted (and received by Highland) by means of an electronic transaction reporting system, access to which requires use of a password or other authorized identifier.  The instructions may be delivered by hand, mail, tested telegram, cable, telex or facsimile sending device.

-2-


2.

Appointment .   The Fund hereby appoints Highland to provide administration services to the Fund, in accordance with the terms set forth in this Agreement.  Highland accepts such appointment and agrees to furnish such services.

 

 

3.

Compliance with Rules and Regulations .

 

 

 

Highland agrees to comply with the applicable requirements of the Securities Laws, and any laws, rules and regulations of governmental authorities having jurisdiction with respect to the duties to be performed by Highland hereunder.  Except as specifically set forth herein, Highland assumes no responsibility for such compliance by the Fund.

 

 

4.

Instructions .

 

 

 

(a)

Unless otherwise provided in this Agreement, Highland shall act only upon Oral Instructions or Written Instructions, including standing Written Instructions related to ongoing instructions received electronically.

 

 

 

 

(b)

Highland shall be entitled to rely upon any Oral Instructions or Written Instructions it receives from an Authorized Person (or from a person reasonably believed by Highland to be an Authorized Person) pursuant to this Agreement.  Highland may assume that any Oral Instruction or Written Instruction received hereunder is not in any way inconsistent with the provisions of organizational documents or this Agreement or of any vote, resolution or proceeding of the Fund’s Board of Trustees or the Fund’s Shareholders, unless and until Highland receives Written Instructions to the contrary.

 

 

 

 

(c)

The Fund agrees to forward to Highland Written Instructions confirming Oral Instructions (except where such Oral Instructions are given by Highland or its

-3-


 

 

affiliates) and shall endeavor to ensure that Highland receives the Written Instructions by the close of business on the same day that such Oral Instructions are received.  The fact that such confirming Written Instructions are not received by Highland shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions. Where Oral Instructions or Written Instructions reasonably appear to have been received from an Authorized Person, Highland shall incur no liability to the Fund in acting upon such Oral Instructions or Written Instructions provided that Highland’s actions comply with the other provisions of this Agreement.

 

 

 

5.

Right to Receive Advice .

 

 

 

(a)

Advice of the Fund .  If Highland is in doubt as to any action it should or should not take, Highland may request directions or advice, including Oral Instructions or Written Instructions, from the Fund.

 

 

 

 

(b)

Advice of Counsel .  If Highland shall be in doubt as to any question of law pertaining to any action it should or should not take, Highland may request advice at its own cost from such counsel of its own choosing (who may be counsel for the Fund or Highland, at the option of Highland).

 

 

 

 

(c)

Conflicting Advice .  In the event of a conflict between directions, advice or Oral Instructions or Written Instructions Highland receives from the Fund, and the advice it receives from counsel, Highland shall be entitled to rely upon and follow the advice of counsel, provided that such counsel is selected with reasonable care. Highland shall promptly inform the Fund of such conflict and Highland shall refrain from acting in the event of a conflict unless counsel advises Highland that

-4-


 

 

a failure to take action is likely to result in additional loss, liability or expense. In the event Highland relies on the advice of counsel, Highland remains liable for any action or omission on the part of Highland which constitutes willful misfeasance, bad faith, negligence or reckless disregard by Highland of any duties, obligations or responsibilities set forth in this Agreement.

 

 

 

 

(d)

Protection of Highland .  Highland shall be protected in any action it takes or does not take in reliance upon directions, advice or Oral Instructions or Written Instructions it receives from the Fund or (to the extent permitted under clause (c) above) from counsel and which Highland believes, in good faith, to be consistent with those directions, advice or Oral Instructions or Written Instructions.  Nothing in this section shall be construed so as to impose an obligation upon Highland (i) to seek such directions, advice or Oral Instructions or Written Instructions, or (ii) to act in accordance with such directions, advice or Oral Instructions or Written Instructions unless, under the terms of other provisions of this Agreement, the same is a condition of Highland’s properly taking or not taking such action. Nothing in this subsection shall excuse Highland when an action or omission on the part of Highland constitutes willful misfeasance, bad faith, negligence or reckless disregard by Highland of any duties, obligations or responsibilities set forth in this Agreement.

-5-


6.

Records; Visits .

 

 

 

(a)

The books and records pertaining to the Fund, which are in the possession or under the control of Highland, shall be the property of the Fund. Such books and records shall be prepared, preserved and maintained as required by the 1940 Act and other applicable securities laws, rules and regulations.  The Fund and its duly authorized officers, employees and agents and the staff of the SEC shall have access to such books and records at all times during Highland’s normal business hours.  Upon the reasonable request of the Fund, copies of any such books and records shall be provided by Highland to the Fund or to an Authorized Person, at the Fund’s expense.  Any such books and records may be maintained in the form of electronic media and stored on any magnetic disk or tape or similar recording method.  No records shall be destroyed without the Fund’s written consent.

 

 

 

 

(b)

Highland shall keep the following records:


 

 

(i)

all books and records with respect to the Fund’s books of account; and

 

 

 

 

 

 

(ii)

records of the Fund’s securities transactions.


7.

Confidentiality .

 

 

 

Each party shall keep confidential any information relating to the other party’s business  (“Confidential Information”).  Confidential Information shall include (a) any data or information that is competitively sensitive material, and not generally known to the public, including, but not limited to, information about product plans, marketing strategies, finances, operations, customer relationships, customer profiles, customer lists, sales estimates, business plans, and internal performance results relating to the past, present or future business activities of the Fund or Highland, their respective subsidiaries

-6-


 

and affiliated companies and the customers, clients and suppliers of any of them; (b) any scientific or technical information, design, process, procedure, formula, or improvement that is commercially valuable and secret in the sense that its confidentiality affords the Fund or Highland a competitive advantage over its competitors; (c) all confidential or proprietary concepts, documentation, reports, data, specifications, computer software, source code, object code, flow charts, databases, inventions, know-how, and trade secrets, whether or not patentable or copyrightable; and (d) anything designated as confidential. Notwithstanding the foregoing, information shall not be subject to such confidentiality obligations if it: (a) is already known to the receiving party at the time it is obtained; (b) is or becomes publicly known or available through no wrongful act of the receiving party; (c) is rightfully received from a third party who, to the best of the receiving party’s knowledge, is not under a duty of confidentiality; (d) is released by the protected party to a third party without restriction; (e) is required to be disclosed by the receiving party pursuant to a requirement of a court order, subpoena, governmental or regulatory agency or law (provided the receiving party will provide the other party written notice of such requirement, to the extent such notice is permitted); (f) is relevant to the defense of any claim or cause of action asserted against the receiving party; or (g) has been or is independently developed or obtained by the receiving party.

 

 

8.

Liaison with Accountants .   Highland shall act as liaison with the Fund’s independent public accountants and shall provide account analyses, fiscal year summaries and other audit related schedules with respect to the Fund.  Highland shall take all reasonable action in the performance of its obligations under this Agreement to ensure that the

-7-


 

necessary information is made available to such independent public accountants as reasonably requested by the Fund.

 

 

9.

Highland System .   Highland shall retain title to and ownership of any and all data bases, computer programs, screen formats, report formats, interactive design techniques, derivative works, inventions, discoveries, patentable or copyrightable matters, concepts, expertise, patents, copyrights, trade secrets and other related legal rights utilized by Highland in connection with the services provided by Highland to the Fund.

 

 

10.

Disaster Recovery .   Highland shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provisions for emergency use of electronic data processing equipment.  In the event of equipment failures, Highland shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions.  Highland shall have no liability with respect to the loss of data or service interruptions caused by equipment failure, provided such loss or interruption is not caused by Highland’s own willful misfeasance, bad faith, negligence or reckless disregard of its duties or obligations under this Agreement.

 

 

11.

Compensation .   As compensation for services rendered by Highland during the term of this Agreement, the Fund will pay to Highland a fee or fees as may be agreed to from time to time in writing by the Fund and Highland.


12.

Indemnification .

 

 

 

(a)

The Fund agrees to indemnify and hold harmless Highland and its affiliates from all taxes, charges, expenses, assessments, claims and liabilities (including without limitation reasonable attorneys’ fees and disbursements and liabilities arising

-8-


 

 

 

 

under the Securities Laws and any state and foreign securities and blue sky laws) (collectively, “Losses”) arising directly or indirectly from any action or omission to act which Highland takes (i) at the request or on the direction of or in reliance on the advice of  the Fund or (ii) upon Oral Instructions or Written Instructions; provided , however , neither Highland nor any of its affiliates, shall be indemnified against any liability (or any expenses incident to such liability) arising out of Highland’s or its affiliates’ own willful misfeasance, bad faith, negligence or reckless disregard of its duties and obligations under this Agreement.

 

 

 

 

(b)

Notwithstanding anything in this Agreement to the contrary, the Fund shall not be liable to Highland or its affiliates for any consequential, special or indirect losses or damages which Highland or its affiliates may incur or suffer as a consequence of this Agreement, whether or not the likelihood of such damages or losses was known by the Fund.

 

 

 

13.

Responsibility of Highland .

 

 

 

(a)

Highland shall be under no duty to take any action on behalf of the Fund except as necessary to fulfill its duties and obligations as specifically set forth herein or as may be specifically agreed to by Highland in writing.  Highland shall be obligated to exercise care and diligence in the performance of its duties hereunder and to act in good faith and to use its best efforts, within reasonable limits, in performing services provided for under this Agreement.  Highland agrees to indemnify and hold harmless the Fund from Losses arising out of Highland’s failure to perform its duties under this Agreement to the extent such damages arise out of Highland’s willful misfeasance, bad faith, negligence or reckless disregard of such duties.

-9-


 

(b)

Without limiting the generality of the foregoing or of any other provision of this Agreement, (i) Highland shall not be liable for losses beyond its control, provided that Highland has acted in accordance with the standard of care set forth above; and (ii) Highland shall not be liable for (A) the validity or invalidity or authority or lack thereof of any Oral Instruction or Written Instruction, notice or other instrument which conforms to the applicable requirements of this Agreement and which Highland reasonably believes to be genuine; or (B) subject to Section 10, delays or errors or loss of data occurring by reason of circumstances beyond Highland’s control, including acts of civil or military authority, national emergencies, labor difficulties, fire, flood, catastrophe, acts of God, insurrection, war, riots or failure of the mails, transportation, communication or power supply.

 

 

 

 

(c)

Notwithstanding anything in this Agreement to the contrary, neither Highland nor its affiliates shall be liable to the Fund for any consequential, special or indirect losses or damages which the Fund may incur or suffer by or as a consequence of Highland’s or its affiliates’ performance of the services provided hereunder, whether or not the likelihood of such losses or damages was known by Highland or its affiliates.

 

 

 

14.

Description of Administration Services on a Continuous Basis .   Highland will perform the following administration services:


 

 

(i)

Prepare monthly security transaction listings;

 

 

 

 

 

 

(ii)

Supply various normal and customary Portfolio and Fund statistical data as requested on an ongoing basis;

 

 

 

 

 

 

(iii)

Prepare for execution and file each Portfolio’s Federal and state tax returns: prepare a fiscal tax provision in coordination with the

-10-


 

 

 

annual audit; prepare an excise tax provision; and prepare all relevant 1099 calculations;

 

 

 

 

 

 

(iv)

Coordinate contractual relationships and communications between the Fund and its contractual service providers;

 

 

 

 

 

 

(v)

Coordinate printing of the Portfolio’s annual and semi-annual shareholder reports;

 

 

 

 

 

 

(vi)

Prepare income and capital gain distributions;

 

 

 

 

 

 

(vii)

Prepare the semiannual and annual financial statements;

 

 

 

 

 

 

(viii)

Monitor the Fund’s and/or each Portfolio’s compliance with IRC, SEC and prospectus requirements;

 

 

 

 

 

 

(ix)

Prepare, coordinate with the Fund’s counsel and coordinate the filing with the SEC: annual (or more frequent as the case may be) Post-Effective Amendments to the Fund’s Registration Statement and supplements to, or revisions of, the Portfolio’s prospectus and statement of additional information; semi-annual reports on Form N-SAR and Form N-CSR; Form N-Q; and Form N-PX based upon information provided by the Fund;

 

 

 

 

 

 

(x)

Prepare and coordinate the Fund’s state notice filings.

 

 

 

 

 

 

(xi)

Assist in the preparation of notices of meetings of shareholders;

 

 

 

 

 

 

(xii)

Assist in obtaining the fidelity bond and trustees’ and officers’/errors and omissions insurance policies for the Fund in accordance with the requirements of Rule 17g-1 and 17d-1(d)(7) under the 1940 Act as such bond and policies are approved by the Fund’s Board of Trustees;

 

 

 

 

 

 

(xiii)

Monitor the Fund’s assets to assure adequate fidelity bond coverage is maintained;

 

 

 

 

 

 

(xiv)

Draft agendas and resolutions for quarterly and special board meetings;

 

 

 

 

 

 

(xv)

Coordinate the preparation, assembly and mailing of board materials;

 

 

 

 

 

 

(xvi)

Attend board meetings and draft minutes thereof;

 

 

 

 

 

 

(xvii)

Maintain the Fund’s calendar to assure compliance with various filing and board approval deadlines;

 

 

 

 

 

 

(xviii)

Furnish the Fund office space in the offices of Highland, or in such other place or places as may be agreed upon from time to time, and all

-11-


 

 

 

necessary office facilities, simple business equipment, supplies, utilities and telephone service for managing the affairs and investments of the Fund;

 

 

 

 

 

 

(xix)

Assist the Fund in the handling of SEC examinations and responses thereto; and

 

 

 

 

 

 

(xx)

Perform such additional administrative duties relating to the administration of the Fund as may subsequently be agreed upon in writing between the Fund and Highland.


15.

Duration and Termination .   This Agreement shall continue until terminated by the Fund or by Highland on sixty (60) days’ prior written notice to the other party.  In the event the Fund gives notice of termination, all expenses associated with movement (or duplication) of records and materials and conversion thereof to a successor administration services agent (and any other service provider(s)), and all trailing expenses incurred by Highland, will be borne by the Fund.

 

 

16.

Notices .   Notices shall be addressed (a) if to Highland, at 13455 Noel Road, Suite 800, Dallas, Texas 75240, Attention:  General Counsel; (b) if to the Fund, at 13455 Noel Road, Suite 800, Dallas, Texas 75240, Attention:  Secretary of the foregoing, at such other address as shall have been given by like notice to the sender of any such notice by the other party.  If notice is sent by confirming telegram, cable, telex or facsimile sending device, it shall be deemed to have been given immediately.  If notice is sent by first class mail, it shall be deemed to have been given three days after it has been mailed.  If notice is sent by messenger, it shall be deemed to have been given on the day it is delivered.

 

 

17.

Amendments .   This Agreement, or any term thereof, may be changed or waived only by a written amendment, signed by the party against whom enforcement of such change or waiver is sought.

-12-


18.

Delegation; Assignment; Sub-Contracting .   This Agreement and the rights and duties of the parties herein may not be assigned or delegated by any party without the written consent of each party.  The Fund hereby authorizes and instructs Highland to enter into a Sub-Administration Services Agreement with PFPC Inc. (“PFPC”), in substantially the form set forth as Exhibit B hereto, including the fees referenced therein and in the Fee Letter between Highland and PFPC.

 

 

19.

Counterparts .   This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

 

 

20.

Further Actions .   Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof.

 

 

21.

Miscellaneous .

 

 

 

(a)

Entire Agreement .  This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties may embody in one or more separate documents their agreement, if any, with respect to delegated duties and Oral Instructions.

 

 

 

 

(b)

Captions .  The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.

-13-


 

(c)

Governing Law .  This Agreement shall be deemed to be a contract made in Delaware and governed by Delaware law, without regard to principles of conflicts of law.

 

 

 

 

(d)

Partial Invalidity .  If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.

 

 

 

 

(e)

Successors and Assigns .  This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.

 

 

 

 

(f)

Facsimile Signatures .  The facsimile signature of any party to this Agreement shall constitute the valid and binding execution hereof by such party.

 

 

 

 

(g)

The Fund will provide such information and documentation as Highland may reasonably request in connection with services provided by Highland to the Fund.

 

 

 

 

(h)

It is expressly agreed that the obligations of the Fund under this Agreement shall not be binding upon any past, present or future trustee, nominee, officer, shareholder, employee or agent of the Fund individually, and shall only be binding upon the Fund and its assets, as provided in the Fund’s Agreement and Declaration of Trust, a copy of which is on file at the office of the Secretary of the State of Delaware and at the principal offices of the Fund.  This Agreement was executed on behalf of the Fund by an officer of the Fund in such capacity, and shall not be deemed to have been executed by such officer individually or to

-14-


 

 

impose any liability on such officer, of the shareholders of the Fund, personally, but shall bind only the assets and property of the Fund.

          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.

 

HIGHLAND CAPITAL MANAGEMENT, L.P.

 

 

 

 

By:

 

 

 

 

 

 

 

Title:

__________________________________________

 

 

 

 

 

 

 

HIGHLAND EQUITY OPPORTUNITIES FUND

 

 

 

 

By:

 

 

 

 

 

 

 

Title:

__________________________________________

-15-


AUTHORIZED PERSONS APPENDIX

NAME (Type)

 

SIGNATURE

 

 

 

 

Mark K. Okada

 

______________________________________________

 

 

 

 

 

 

R. Joseph Dougherty

 

______________________________________________

 

 

 

 

 

 

M. Jason Blackburn

 

______________________________________________

-16-

SUB-ADMINISTRATION SERVICES AGREEMENT

           THIS AGREEMENT is made as of____________________, 2006 by and between HIGHLAND CAPITAL MANAGEMENT, L.P., a Delaware limited partnership (“Highland”), and PFPC INC., a Massachusetts corporation (“PFPC”).

W I T N E S S E T H:

          WHEREAS, Highland serves as administrator of the Highland Funds I (the “Fund”), a Delaware statutory trust that is registered as an open-end, non-diversified management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”); and

          WHEREAS, Highland wishes to retain PFPC to provide certain sub-administration services to the Fund’s investment portfolios listed on Exhibit A attached hereto and made a part hereof, as such Exhibit A may be amended from time to time (each a “Portfolio”), and PFPC wishes to furnish such services.

          NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows:

1.

Definitions.  As Used in this Agreement:

 

 

 

 

(a)

“ 1933 Ac t” means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder.

 

 

 

 

(b)

“ 1934 Act ” means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder.

 

 

 

 

(c)

“ 1940 Act ” has the meaning set forth in the recitals hereof and includes the rules and regulations of the SEC promulgated thereunder.

 

 

 

1


 

(d)

“ Authorized Person ” means any officer of Highland, the Fund and any other person duly authorized by the Fund’s Board of Trustees to give Oral Instructions or Written Instructions on behalf of the Fund and listed on the Authorized Persons Appendix attached hereto and made a part hereof or any amendment thereto as may be received by PFPC. An Authorized Person’s scope of authority may be limited by Highland by setting forth such limitation in the Authorized Persons Appendix.

 

 

 

 

(e)

“ Board of Trustees ” and “Shareholders” shall have the same meanings as used in the Fund’s organizational documents.

 

 

 

 

(f)

“ Oral Instructions ” mean oral instructions received by PFPC from an Authorized Person or from a person reasonably believed by PFPC to be an Authorized Person.

 

 

 

 

(g)

“ SEC ” means the Securities and Exchange Commission.

 

 

 

 

(h)

“ Securities Laws ” mean the 1933 Act, the 1934 Act and the 1940 Act.

 

 

 

 

(i)

“ Shares ” mean the Fund’s shares of beneficial interest.

 

 

 

 

(j)

“ Written Instructions ” means (i) written instructions signed by an Authorized Person and received by PFPC or (ii) trade instructions transmitted (and received by PFPC) by means of an electronic transaction reporting system, access to which requires use of a password or other authorized identifier.  The instructions may be delivered by hand, mail, tested telegram, cable, telex or facsimile sending device.

 

 

 

2.

Appointment .   Highland hereby appoints PFPC to provide sub-administration services to each of the Portfolios, in accordance with the terms set forth in this Agreement.  PFPC accepts such appointment and agrees to furnish such services.

 

 

 

2


3.

Compliance with Rules and Regulations .

 

 

 

 

PFPC agrees to comply with the applicable requirements of the Securities Laws, and any laws, rules and regulations of governmental authorities having jurisdiction with respect to the duties to be performed by PFPC hereunder.  Except as specifically set forth herein, PFPC assumes no responsibility for such compliance by Highland or the Fund.

 

 

 

4.

Instructions .

 

 

 

 

(a)

Unless otherwise provided in this Agreement, PFPC shall act only upon Oral Instructions or Written Instructions, including standing Written Instructions related to ongoing instructions received electronically.

 

 

 

 

(b)

PFPC shall be entitled to rely upon any Oral Instructions or Written Instructions it receives from an Authorized Person (or from a person reasonably believed by PFPC to be an Authorized Person) pursuant to this Agreement.  PFPC may assume that any Oral Instruction or Written Instruction received hereunder is not in any way inconsistent with the provisions of organizational documents or this Agreement or of any vote, resolution or proceeding of the Fund’s Board of Trustees or of the Fund’s Shareholders, unless and until PFPC receives Written Instructions to the contrary.

 

 

 

 

(c)

Highland agrees to forward to PFPC Written Instructions confirming Oral Instructions (except where such Oral Instructions are given by PFPC or its affiliates) and shall endeavor to ensure that PFPC receives the Written Instructions by the close of business on the same day that such Oral Instructions are received.  The fact that such confirming Written Instructions

 

 

 

3


 

 

are not received by PFPC shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions.  Where Oral Instructions or Written Instructions reasonably appear to have been received from an Authorized Person, PFPC shall incur no liability to Highland or the Fund in acting upon such Oral Instructions or Written Instructions provided that PFPC’s actions comply with the other provisions of this Agreement.

 

 

 

5.

Right to Receive Advice .

 

 

 

 

(a)

Advice of Highland or the Fund .  If PFPC is in doubt as to any action it should or should not take, PFPC may request directions or advice, including Oral Instructions or Written Instructions, from Highland or the Fund.

 

 

 

 

(b)

Advice of Counsel .  If PFPC shall be in doubt as to any question of law pertaining to any action it should or should not take, PFPC may request advice at its own cost from such counsel of its own choosing (who may be counsel for Highland, the Fund, or PFPC, at the option of PFPC).

 

 

 

 

(c)

Conflicting Advice .  In the event of a conflict between directions, advice or Oral Instructions or Written Instructions PFPC receives from Highland or the Fund, and the advice it receives from counsel, PFPC shall be entitled to rely upon and follow the advice of counsel, provided that such counsel is selected with reasonable care.  PFPC shall promptly inform Highland of such conflict and PFPC shall refrain from acting in the event of a conflict unless counsel advises PFPC that a failure to take action is likely to result in additional loss, liability or expense.  In the event PFPC relies on the advice of counsel, PFPC remains liable for any action or omission on the part of

4


 

 

PFPC which constitutes willful misfeasance, bad faith, negligence or reckless disregard by PFPC of any duties, obligations or responsibilities set forth in this Agreement.

 

 

 

 

(d)

Protection of PFPC .  PFPC shall be protected in any action it takes or does not take in reliance upon directions, advice or Oral Instructions or Written Instructions it receives from Highland or the Fund or (to the extent permitted under clause (c) above) from counsel and which PFPC believes, in good faith, to be consistent with those directions, advice or Oral Instructions or Written Instructions.  Nothing in this section shall be construed so as to impose an obligation upon PFPC (i) to seek such directions, advice or Oral Instructions or Written Instructions, or (ii) to act in accordance with such directions, advice or Oral Instructions or Written Instructions unless, under the terms of other provisions of this Agreement, the same is a condition of PFPC’s properly taking or not taking such action.  Nothing in this subsection shall excuse PFPC when an action or omission on the part of PFPC constitutes willful misfeasance, bad faith, gross negligence or reckless disregard by PFPC of any duties, obligations or responsibilities set forth in this Agreement.

 

 

 

6.

Records; Visits .

 

 

 

 

(a)

The books and records pertaining to the Fund and the Portfolios, which are in the possession or under the control of PFPC, shall be the property of the Fund.  Such books and records shall be prepared, preserved and maintained as required by the 1940 Act and other applicable securities laws, rules and regulations.  Highland, the Fund and their duly authorized officers,

 

 

 

5


 

 

employees and agents and the staff of the SEC shall have access to such books and records at all times during PFPC’s normal business hours.  Upon the reasonable request of Highland, copies of any such books and records shall be provided by PFPC to Highland, the Fund or to an Authorized Person, at Highland’s expense.  Any such books and records may be maintained in the form of electronic media and stored on any magnetic disk or tape or similar recording method.

 

 

 

 

 

(b)

PFPC shall keep the following records:

 

 

 

 

 

 

(i)

all books and records with respect to each Portfolio’s books of account; and

 

 

 

 

 

 

(ii)

records of each Portfolio’s securities transactions.

 

 

 

 

7.

Confidentiality .

 

 

 

 

 

Each party shall keep confidential any information relating to the other party’s business (“Confidential Information”).  Confidential Information shall include (a) any data or information that is competitively sensitive material, and not generally known to the public, including, but not limited to, information about product plans, marketing strategies, finances, operations, customer relationships, customer profiles, customer lists, sales estimates, business plans, and internal performance results relating to the past, present or future business activities of Highland, the Fund or PFPC, their respective subsidiaries and affiliated companies and the customers, clients and suppliers of any of them; (b) any scientific or technical information, design, process, procedure, formula, or improvement that is commercially valuable and secret in the sense that its confidentiality affords Highland, the Fund or PFPC a competitive advantage over its competitors; (c) all confidential or proprietary

 

 

 

 

6


 

concepts, documentation, reports, data, specifications, computer software, source code, object code, flow charts, databases, inventions, know-how, and trade secrets, whether or not patentable or copyrightable; and (d) anything designated as confidential.  Notwithstanding the foregoing, information shall not be subject to such confidentiality obligations if it: (a) is already known to the receiving party at the time it is obtained; (b) is or becomes publicly known or available through no wrongful act of the receiving party; (c) is rightfully received from a third party who, to the best of the receiving party’s knowledge, is not under a duty of confidentiality; (d) is released by the protected party to a third party without restriction; (e) is required to be disclosed by the receiving party pursuant to a requirement of a court order, subpoena, governmental or regulatory agency or law (provided the receiving party will provide the other party written notice of such requirement, to the extent such notice is permitted); (f) is relevant to the defense of any claim or cause of action asserted against the receiving party; (g) is Fund information provided by PFPC in connection with an independent third party compliance or other review; or (h) has been or is independently developed or obtained by the receiving party.

 

 

8.

Liaison with Accountants .   PFPC shall act as liaison with the Fund’s independent public accountants and shall provide account analyses, fiscal year summaries, and other audit-related schedules with respect to each Portfolo.  PFPC shall take all reasonable action in the performance of its obligations under this Agreement to ensure that the necessary information is made available to such independent public accountants as reasonably requested by Highland.

 

 

9.

PFPC System .   PFPC shall retain title to and ownership of any and all data bases, computer programs, screen formats, report formats, interactive design techniques,

 

 

7


 

derivative works, inventions, discoveries, patentable or copyrightable matters, concepts, expertise, patents, copyrights, trade secrets, and other related legal rights utilized by PFPC in connection with the services provided by PFPC to Highland.

 

 

 

10.

Disaster Recovery .   PFPC shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provisions for emergency use of electronic data processing equipment.  In the event of equipment failures, PFPC shall, at no additional expense to Highland, take reasonable steps to minimize service interruptions.  PFPC shall have no liability with respect to the loss of data or service interruptions caused by equipment failure, provided such loss or interruption is not caused by PFPC’s own willful misfeasance, bad faith, negligence or reckless disregard of its duties or obligations under this Agreement.

 

 

 

11.

Compensation .   As compensation for services rendered by PFPC during the term of this Agreement, Highland, on behalf of each Portfolio, will pay to PFPC a fee or fees as may be agreed to from time to time in writing by Highland and PFPC. Highland hereby represents and warrants to PFPC that (i) the terms of this Agreement and (ii) the fees and expenses associated with this Agreement have been approved by the Board of Trustees of the Fund to the extent required by applicable law.

 

 

 

12.

Indemnification .

 

 

 

 

(a)

Highland, on behalf of each Portfolio, agrees to indemnify, defend and hold harmless PFPC and its affiliates from all taxes, charges, expenses, assessments, claims and liabilities (including without limitation reasonable attorneys’ fees and disbursements and liabilities arising under the Securities Laws and any state and foreign securities and blue sky laws) (collectively,

 

 

 

8


 

 

“Losses”) arising directly or indirectly from any action or omission to act which PFPC takes (i) at the request or on the direction of or in reliance on the advice of Highland or the Fund or (ii) upon Oral Instructions or Written Instructions; provided, however, neither PFPC nor any of its affiliates, shall be indemnified against any liability (or any expenses incident to such liability) arising out of PFPC’s or its affiliates’ own willful misfeasance, bad faith, negligence or reckless disregard of its duties and obligations under this Agreement.

 

 

 

 

(b)

Notwithstanding anything in this Agreement to the contrary, Highland shall not be liable to PFPC or its affiliates for any consequential, special or indirect losses or damages which PFPC or its affiliates may incur or suffer as a consequence of this Agreement, whether or not the likelihood of such damages or losses was known by Highland.

 

 

 

13.

Responsibility of PFPC .

 

 

 

 

(a)

PFPC shall be under no duty to take any action on behalf of Highland or the Fund except as necessary to fulfill its duties and obligations as specifically set forth herein or as may be specifically agreed to by PFPC in writing. PFPC shall be obligated to exercise care and diligence in the performance of its duties hereunder and to act in good faith and to use its best efforts, within reasonable limits, in performing services provided for under this Agreement. PFPC agrees to indemnify and hold harmless Highland from Losses arising out of PFPC’s failure to perform its duties under this Agreement to the extent such damages arise out of PFPC’s willful misfeasance, bad faith, negligence or reckless disregard of such duties.

 

 

 

9


 

(b)

Without limiting the generality of the foregoing or of any other provision of this Agreement, (i) PFPC shall not be liable for losses beyond its control, provided that PFPC has acted in accordance with the standard of care set forth above; and (ii) PFPC shall not be liable for (A) the validity or invalidity or authority or lack thereof of any Oral Instruction or Written Instruction, notice or other instrument which conforms to the applicable requirements of this Agreement and which PFPC reasonably believes to be genuine; or (B) subject to Section 10, delays or errors or loss of data occurring by reason of circumstances beyond PFPC’s control, including acts of civil or military authority, national emergencies, labor difficulties, fire, flood, catastrophe, acts of God, insurrection, war, riots or failure of the mails, transportation, communication or power supply.

 

 

 

 

 

(c)

Notwithstanding anything in this Agreement to the contrary, neither PFPC nor its affiliates shall be liable to Highland for any consequential, special or indirect losses or damages which Highland may incur or suffer by or as a consequence of PFPC’s or its affiliates’ performance of the services provided hereunder, whether or not the likelihood of such losses or damages was known by PFPC or its affiliates.

 

 

 

 

14.

Description of Sub-Administration Services on a Continuous Basis .   PFPC will perform the following administration services:

 

 

 

 

 

 

(i)

Prepare monthly security transaction listings;

 

 

 

 

 

 

(ii)

Supply various normal and customary Portfolio and Fund statistical data as requested on an ongoing basis;

 

 

 

 

 

 

(iii)

Prepare for execution and file each Portfolio’s Federal and state tax returns: prepare a fiscal tax provision in coordination with the annual

10


 

 

 

audit; prepare an excise tax provision; and prepare all relevant 1099 calculations;

 

 

 

 

 

 

(iv)

Coordinate contractual relationships and communications between the Fund and its contractual service providers;

 

 

 

 

 

 

(v)

Coordinate printing of each Portfolio’s annual and semi-annual shareholder reports;

 

 

 

 

 

 

(vi)

Prepare income and capital gain distributions;

 

 

 

 

 

 

(vii)

Prepare the semiannual and annual financial statements;

 

 

 

 

 

 

(viii)

Assist with monitoring each Portfolio’s compliance with IRC, SEC and prospectus requirements;

 

 

 

 

 

 

(ix)

Prepare, coordinate with the Fund’s counsel and coordinate the filing with the SEC: annual Post-Effective Amendment to the Fund’s Registration Statement; semi-annual reports on Form N-SAR; and, for an additional fee, the following forms: Form N-CSR; Form N-Q; and Form N-PX (based upon voting information provided by the Fund and in the format required by PFPC);

 

 

 

 

 

 

(x)

Monitor each Portfolio’s compliance with the amounts and conditions of each state qualification; and

 

 

 

 

 

 

(xi)

In connection with blue sky filings, the Fund hereby grants PFPC a limited power of attorney on behalf of the Fund to sign all blue sky filings and other related documents in order to effect such filings. The Fund will provide PFPC a listing of all jurisdictions in which each Portfolio (and class thereof) is lawfully available for sale as of the date of this Agreement and in which the Fund desires PFPC to effect a blue sky filing.

 

 

 

 

 

 

(xii)

Assist administratively in obtaining the fidelity bond and trustees’ and officers’/errors and omissions insurance policies for the Fund in accordance with the requirements of Rule 17g-1 and 17d-1(d)(7) under the 1940 Act as such bond and policies are approved by the Fund’s Board of Directors;

 

 

 

 

 

 

(xiii)

Monitor the Fund’s assets to assure adequate fidelity bond coverage is maintained;

 

 

 

 

 

 

(xiv)

Draft agendas and resolutions for quarterly board meetings;

 

 

 

 

 

 

(xv)

Coordinate the preparation, assembly and mailing of materials for quarterly board meetings;

 

 

 

 

11


 

 

(xvi)

Attend quarterly board meetings and draft minutes thereof;

 

 

 

 

 

 

(xvii)

Maintain a Fund calendar to assure compliance with various SEC filing and board approval deadlines;

 

 

 

 

 

 

(xviii)

Assist the Fund in the handling of SEC examinations and responses thereto;

 

 

 

 

 

 

(xix)

If the chief executive officer or chief financial officer of the Fund is required to provide a certification as part of the Fund’s Form N-CSR or Form N-Q filing pursuant to regulations promulgated by the SEC under Section 302 of the Sarbanes-Oxley Act of 2002, PFPC will provide (to such person or entity as agreed between the Fund and PFPC) a sub-certification in support of certain matters set forth in the aforementioned certification, such sub-certification to be in such form and relating to such matters as agreed between the Fund and PFPC from time to time.  PFPC shall be required to provide the sub-certification only during the term of the Agreement and only if it receives such cooperation as it may request to perform its investigations with respect to the sub-certification.  For clarity, the sub-certification is not itself a certification under the Sarbanes-Oxley Act of 2002 or under any other regulatory requirement; and

 

 

 

 

 

 

(xx)

Perform such additional administrative duties relating to the administration of the Fund as may subsequently be agreed upon in writing between the Fund and PFPC.

 

 

 

 

 

All regulatory services are subject to the review and approval of Fund counsel.

 

 

 

 

15.

Duration and Termination .   This Agreement shall continue until terminated by Highland or by PFPC on sixty (60) days’ prior written notice to the other party.  In the event Highland gives notice of termination, all expenses associated with movement (or duplication) of records and materials and conversion thereof to a successor administration services agent (and any other service provider(s)), and all trailing expenses incurred by PFPC, will be borne by Highland.

 

 

 

 

16.

Notices . Notices shall be addressed (a) if to PFPC, at 301 Bellevue Parkway, Wilmington, Delaware 19809, Attention: General Counsel; (b) if to Highland, at _________________, Attention: ________________, or at such other address as shall

 

 

 

 

 

 

 

12


 

have been given by like notice to the sender of any such notice by the other party. If notice is sent by confirming telegram, cable, telex or facsimile sending device, it shall be deemed to have been given immediately. If notice is sent by first-class mail, it shall be deemed to have been given three days after it has been mailed. If notice is sent by messenger, it shall be deemed to have been given on the day it is delivered.

 

 

 

17.

Amendments .  This Agreement, or any term thereof, may be changed or waived only by a written amendment, signed by the party against whom enforcement of such change or waiver is sought.

 

 

 

18.

Delegation; Assignment; Sub-Contracting .   This Agreement and the rights and duties of the parties herein may not be assigned or delegated by any party without the written consent of each party, except that PFPC may assign or delegate its duties to any majority owned direct or indirect subsidiary of PFPC or of The PNC Financial Services Group, Inc. upon thirty (30) days prior written notice to Highland or the Fund.

 

 

 

19.

Counterparts .   This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

 

 

 

20.

Further Actions .  Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof.

 

 

 

21.

Miscellaneous .

 

 

 

 

(a)

Entire Agreement .  This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties

13


 

 

may embody in one or more separate documents their agreement, if any, with respect to delegated duties and Oral Instructions.

 

 

 

 

(b)

Captions.   The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.

 

 

 

 

(c)

Governing Law .  This Agreement shall be deemed to be a contract made in Delaware and governed by Delaware law, without regard to principles of conflicts of law.

 

 

 

 

(d)

Partial Invalidity .  If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.

 

 

 

 

(e)

Successors and Assigns.   This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.

 

 

 

 

(f)

Facsimile Signatures .  The facsimile signature of any party to this Agreement shall constitute the valid and binding execution hereof by such party.

 

 

 

 

(g)

Highland will provide such information and documentation as PFPC may reasonably request in connection with services provided by PFPC to Highland.

 

 

 

 

(h)

To help the U.S. government fight the funding of terrorism and money laundering activities, U.S. Federal law requires each financial institution to obtain, verify, and record certain.  information that identifies each person who initially opens an account with that financial institution on or after

 

 

 

14


 

 

October 1, 2003.  PFPC and certain of its affiliates are financial institutions, and PFPC may, as a matter of policy, request (or may have already requested) the Fund’s name, address and taxpayer identification number or other government-issued identification number, and, if such party is a natural person, that party’s date of birth. PFPC may also ask (and may have already asked) for additional identifying information, and PFPC may take steps (and may have already taken steps) to verify the authenticity and accuracy of these data elements.

 

 

 

 

(i)

Notwithstanding any provision hereof, the services of PFPC are not, nor shall they be, construed as constituting legal advice or the provision of legal services for or on behalf of the Fund or any other person.

 

 

 

15


          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.

 

PFPC INC.

 

 

 

 

By:

 

 

 

 

Title

:

 

 

 

 

 

 

 

HIGHLAND CAPITAL MANAGEMENT, L.P.

 

 

 

 

By:

 

 

 

 

Title

:

 

 

16


AUTHORIZED PERSONS APPENDIX

NAME

 

SIGNATURE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17


EXHIBIT A

          THIS EXHIBIT A, dated as of_______________, 2006 is Exhibit A to that certain Sub-Administration Services Agreement dated as of________________, 2006 between PFPC Inc. and Highland Capital Management, L.P.

PORTFOLIOS

HIGHLAND EQUITY OPPORTUNITIES FUND

18

TRANSFER AGENCY SERVICES AGREEMENT

          THIS AGREEMENT is made as of ___________, 2006 by and between PFPC INC., a Massachusetts corporation (“PFPC”), and HIGHLAND FUNDS I, a Delaware statutory trust (the “Fund”).

W I T N E S S E T H:

          WHEREAS, the Fund is registered as an open-end, non-diversified management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”); and

          WHEREAS, the Fund wishes to retain PFPC to serve as transfer agent, registrar, dividend disbursing agent and shareholder servicing agent to its investment portfolios listed on Exhibit A attached hereto and made a part hereof, as such Exhibit A may be amended from time to time (each a “Portfolio”), and PFPC wishes to furnish such services.    

          NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows:   

1.

Definitions .  As used in this Agreement:

 

 

 

(a)

“1933 Act” means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder.

 

 

 

 

(b)

“1934 Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder.

 

 

 

 

(c)

“1940 Act” has the meaning set forth in the recitals hereof and includes the rules and regulations of the SEC promulgated thereunder.

 

 

 

 

(d)

“Authorized Person” means any officer of the Fund and any other person duly


 

 

authorized by the Fund’s Board of Trustees to give Oral Instructions or Written Instructions on behalf of the Fund and listed on the Authorized Persons Appendix attached hereto and made a part hereof or any amendment thereto as may be received by PFPC.  An Authorized Person’s scope of authority may be limited by the Fund by setting forth such limitation in the Authorized Persons Appendix.

 

 

 

 

(e)

“Board of Trustees” and “Shareholders” shall have the same meanings as used in the Fund’s organizational documents.

 

 

 

 

(f)

“Oral Instructions” mean oral instructions received by PFPC from an Authorized Person or from a person reasonably believed by PFPC to be an Authorized Person.

 

 

 

 

(g)

“SEC” means the Securities and Exchange Commission.

 

 

 

 

(h)

“Securities Laws” mean the 1933 Act, the 1934 Act and the 1940 Act.

 

 

 

 

(i)

“Shares” mean the Fund’s shares of beneficial interest.

 

 

 

 

(j)

“Written Instructions” means (i) written instructions signed by an Authorized Person and received by PFPC or (ii) trade instructions transmitted (and received by PFPC) by means of an electronic transaction reporting system access to which requires use of a password or other authorized identifier.  The instructions may be delivered by hand, mail, tested telegram, cable, telex or facsimile sending device.

 

 

 

2.

Appointment .   The Fund hereby appoints PFPC to serve as transfer agent, registrar, dividend disbursing agent and shareholder servicing agent to each of the Portfolios in accordance with the terms set forth in this Agreement.  PFPC accepts such appointment and agrees to furnish such services.

 

 

 

3.

Compliance with Rules and Regulations .   PFPC agrees to comply with the applicable requirements of the Securities Laws, and any laws, rules and regulations of governmental

2


 

authorities having jurisdiction with respect to the duties to be performed by PFPC hereunder.  Except as specifically set forth herein, PFPC assumes no responsibility for such compliance by the Fund.

 

 

 

4.

Instructions .

 

 

 

 

(a)

Unless otherwise provided in this Agreement, PFPC shall act only upon Oral Instructions or Written Instructions, including standing Written Instructions related to ongoing instructions received electronically.

 

 

 

 

(b)

PFPC shall be entitled to rely upon any Oral Instruction or Written Instruction it receives from an Authorized Person (or from a person reasonably believed by PFPC to be an Authorized Person) pursuant to this Agreement.  PFPC may assume that any Oral Instruction or Written Instruction received hereunder is not in any way inconsistent with the provisions of organizational documents or this Agreement or of any vote, resolution or proceeding of the Fund’s Board of Trustees or of the Fund’s Shareholders, unless and until PFPC receives Written Instructions to the contrary.

 

 

 

 

(c)

The Fund agrees to forward to PFPC Written Instructions confirming Oral Instructions (except where such Oral Instructions are given by PFPC or its affiliates) and shall endeavor to ensure that PFPC receives the Written Instructions by the close of business on the same day that such Oral Instructions are received.  The fact that such confirming Written Instructions are not received by PFPC shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions. Where Oral Instructions or Written Instructions reasonably appear to have been received from an Authorized

3


 

 

Person, PFPC shall incur no liability to the Fund in acting upon such Oral Instructions or Written Instructions provided that PFPC’s actions comply with the other provisions of this Agreement.

 

 

 

5.

Right to Receive Advice .

 

 

 

 

(a)

Advice of the Fund .  If PFPC is in doubt as to any action it should or should not take, PFPC may request directions or advice, including Oral Instructions or Written Instructions, from the Fund.

 

 

 

 

(b)

Advice of Counsel .  If PFPC shall be in doubt as to any question of law pertaining to any action it should or should not take, PFPC may request advice at its own cost from such counsel of its own choosing (who may be counsel for the Fund, the Fund’s investment adviser or PFPC, at the option of PFPC).

 

 

 

 

(c)

Conflicting Advice .  In the event of a conflict between directions, advice or Oral Instructions or Written Instructions PFPC receives from the Fund, and the advice it receives from counsel, PFPC shall be entitled to rely upon and follow the advice of counsel provided that such counsel is selected with reasonable care. PFPC shall promptly inform the Fund of such conflict and PFPC shall refrain from acting in the event of a conflict unless counsel advises PFPC that a failure to take action is likely to result in additional loss, liability or expense. In the event PFPC relies on the advice of counsel, PFPC remains liable for any action or omission on the part of PFPC which constitutes willful misfeasance, bad faith, negligence or reckless disregard by PFPC of any duties, obligations or responsibilities set forth in this Agreement.

 

 

 

 

(d)

Protection of PFPC .  PFPC shall be protected in any action it takes or does not

4


 

 

take in reliance upon directions, advice or Oral Instructions or Written Instructions it receives from the Fund or (to the extent permitted under clause (c) above) from counsel and which PFPC believes, in good faith, to be consistent with those directions, advice or Oral Instructions or Written Instructions.  Nothing in this section shall be construed so as to impose an obligation upon PFPC (i) to seek such directions, advice or Oral Instructions or Written Instructions, or (ii) to act in accordance with such directions, advice or Oral Instructions or Written Instructions unless, under the terms of other provisions of this Agreement, the same is a condition of PFPC’s properly taking or not taking such action. Nothing in this subsection shall excuse PFPC when an action or omission on the part of PFPC constitutes willful misfeasance, bad faith, negligence or reckless disregard by PFPC of any duties, obligations or responsibilities set forth in this Agreement.

 

 

 

6.

Records; Visits .   The books and records pertaining to the Fund and the Portfolios, which are in the possession or under the control of PFPC, shall be the property of the Fund.  Such books and records shall be prepared, preserved and maintained as required by the 1940 Act and other applicable securities laws, rules and regulations.  The Fund and its duly authorized officers, employees and agents and the staff of the SEC shall have access to such books and records at all times during PFPC’s normal business hours.  Upon the reasonable request of the Fund, copies of any such books and records shall be provided by PFPC to the Fund or to an Authorized Person, at the Fund’s expense.

 

 

 

7. Confidentiality .   Each party shall keep confidential any information relating to the other party’s business (“Confidential Information”).  Confidential Information shall include (a) any data or information that is competitively sensitive material, and not generally known

5


 

to the public, including, but not limited to, information about product plans, marketing strategies, finances, operations, customer relationships, customer profiles, customer lists, sales estimates, business plans, and internal performance results relating to the past, present or future business activities of the Fund or PFPC, their respective subsidiaries and affiliated companies and the customers, clients and suppliers of any of them; (b) any scientific or technical information, design, process, procedure, formula, or improvement that is commercially valuable and secret in the sense that its confidentiality affords the Fund or PFPC a competitive advantage over its competitors; (c) all confidential or proprietary concepts, documentation, reports, data, specifications, computer software, source code, object code, flow charts, databases, inventions, know-how, and trade secrets, whether or not patentable or copyrightable; and (d) anything designated as confidential. Notwithstanding the foregoing, information shall not be subject to such confidentiality obligations if it: (a) is already known to the receiving party at the time it is obtained; (b) is or becomes publicly known or available through no wrongful act of the receiving party; (c) is rightfully received from a third party who, to the best of the receiving party’s knowledge, is not under a duty of confidentiality; (d) is released by the protected party to a third party without restriction; (e) is required to be disclosed by the receiving party pursuant to a requirement of a court order, subpoena, governmental or regulatory agency or law (provided the receiving party will provide the other party written notice of such requirement, to the extent such notice is permitted); (f) is relevant to the defense of any claim or cause of action asserted against the receiving party; or (g) has been or is independently developed or obtained by the receiving party.

6


8.

Cooperation with Accountants .   PFPC shall cooperate with the Fund’s independent public accountants and shall take all reasonable action in the performance of its obligations under this Agreement to ensure that the necessary information is made available to such independent public accountants as reasonably requested by the Fund.

 

 

9.

PFPC System .  PFPC shall retain title to and ownership of any and all data bases, computer programs, screen formats, report formats, interactive design techniques, derivative works, inventions, discoveries, patentable or copyrightable matters, concepts, expertise, patents, copyrights, trade secrets, and other related legal rights utilized by PFPC in connection with the services provided by PFPC to the Fund.

 

 

10.

Disaster Recovery .   PFPC shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provisions for emergency use of electronic data processing equipment.  In the event of equipment failures, PFPC shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions.  PFPC shall have no liability with respect to the loss of data or service interruptions caused by equipment failure, provided such loss or interruption is not caused by PFPC’s own willful misfeasance, bad faith, negligence or reckless disregard of its duties or obligations under this Agreement.

 

 

11.

Compensation .

 

 

 

(a)

As compensation for services rendered by PFPC during the term of this Agreement, the Fund, on behalf of each Portfolio, will pay to PFPC a fee or fees as may be agreed to from time to time in writing by the Fund and PFPC.  The Fund acknowledges that PFPC may receive float benefits and/or investment earnings in connection with its maintaining certain accounts under this Agreement.

7


 

(b)

The undersigned hereby represents and warrants to PFPC that (i) the terms of this Agreement, and (ii) the fees and expenses associated with this Agreement have been approved by the Board of Trustees of the Fund to the extent required by applicable law.

 

 

 

12.

Indemnification .

 

 

 

 

(a)

The Fund, on behalf of each Portfolio, agrees to indemnify, defend and hold harmless PFPC and its affiliates from all taxes, charges, expenses, assessments, claims and liabilities (including without limitation reasonable attorneys’ fees and disbursements and liabilities arising under the Securities Laws and any state and foreign securities and blue sky laws) (collectively, “Losses”) arising from any action or omission to act which PFPC takes (i) at the request or on the direction of or in reliance on the advice of the Fund or (ii) upon Oral Instructions or Written Instructions; provided, however, neither PFPC, nor any of its affiliates, shall be indemnified against any liability (or any expenses incident to such liability) arising out of PFPC’s or its affiliates’ own willful misfeasance, bad faith, negligence or reckless disregard of its duties and obligations under this Agreement; provided further that in the absence of a finding to the contrary the acceptance, processing and/or negotiation of a fraudulent payment for the purchase of Shares shall be presumed not to have been the result of PFPC’s or its affiliates own willful misfeasance, bad faith, negligence or reckless disregard of such duties and obligations under this Agreement.

8


 

(b)

Notwithstanding anything in this Agreement to the contrary, the Fund shall not be liable to PFPC or its affiliates for any consequential, special or indirect losses or damages which PFPC or its affiliates may incur or suffer as a consequence of this Agreement, whether or not the likelihood of such damages or losses was known by the Fund.

 

 

 

13.

Responsibility of PFPC .

 

 

 

 

  (a)

PFPC shall be under no duty to take any action on behalf of the Fund or any Portfolio except as necessary to fulfill its duties and obligations as specifically set forth herein or as may be specifically agreed to by PFPC in writing.  PFPC shall be obligated to exercise care and diligence in the performance of its duties hereunder and to act in good faith and to use its best efforts, within reasonable limits, in performing services provided for under this Agreement.  PFPC agrees to indemnify, defend and hold harmless the Fund from Losses arising out of PFPC’s failure to perform its duties under this Agreement to the extent such damages arise out of PFPC’s willful misfeasance, bad faith, negligence or reckless disregard of such duties.  

 

 

 

 

  (b)

  Without limiting the generality of the foregoing or of any other provision of this Agreement, (i) PFPC shall not be liable for losses beyond its control, provided that PFPC has acted in accordance with the standard of care set forth above; and (ii) PFPC shall not be liable for (A) the validity or invalidity or authority or lack thereof of any Oral Instruction or Written Instruction, notice or other instrument which conforms to the applicable requirements of this Agreement, and which PFPC reasonably believes to be genuine; or (B) subject to Section 10, delays or

9


    errors or loss of data occurring by reason of circumstances beyond PFPC’s control, including acts of civil or military authority, national emergencies, labor difficulties, fire, flood, catastrophe, acts of God, insurrection, war, riots or failure of the mails, transportation, communication or power supply.  

 

 

 

 

 

(c)

Notwithstanding anything in this Agreement to the contrary, neither PFPC nor its affiliates shall be liable to the Fund for any consequential, special or indirect losses or damages which the Fund may incur or suffer by or as a consequence of PFPC’s or its affiliates’ performance of the services provided hereunder, whether or not the likelihood of such losses or damages was known by PFPC or its affiliates.

 

 

 

 

14.

Description of Services .

 

 

 

(a)

Services Provided on an Ongoing Basis, If Applicable.

 

 

 

 

 

(i)

Calculate 12b-1 payments;

 

 

 

 

 

 

(ii)

Maintain shareholder registrations;

 

 

 

 

 

 

(iii)

Review new applications and correspond with shareholders to complete or correct information;

 

 

 

 

 

 

(iv)

Direct payment processing of checks or wires;

 

 

 

 

 

 

(v)

Prepare and certify stockholder lists in conjunction with proxy solicitations;

 

 

 

 

 

 

(vi)

Countersign share certificates;

 

 

 

 

 

 

(vii)

Prepare and mail to shareholders confirmation of activity;

 

 

 

 

 

 

(viii)

Provide toll-free lines for direct shareholder use, plus customer liaison staff for on-line inquiry response;

 

 

 

 

 

 

(ix)

Mail duplicate confirmations to broker-dealers of their clients’ activity, whether executed through the broker-dealer or directly with PFPC;

10


 

 

(x)

Provide periodic shareholder lists and statistics to the Fund;

 

 

 

 

 

 

(xi)

Provide detailed data for underwriter/broker confirmations;

 

 

 

 

 

 

(xii)

Prepare periodic mailing of year-end tax and statement information;

 

 

 

 

 

 

(xiii)

Notify on a timely basis the investment adviser, accounting agent, and custodian of fund activity;

 

 

 

 

 

 

(xiv)

Perform other participating broker-dealer shareholder services as may be agreed upon from time to time;

 

 

 

 

 

 

(xv)

Accept and post daily Share purchases and redemptions;

 

 

 

 

 

 

(xvi)

Accept, post and perform shareholder transfers and exchanges; and

 

 

 

 

 

 

(xvii)

Issue and cancel certificates (when requested in writing by the shareholder).

 

 

 

 

 

(b)

Purchase of Shares .  PFPC shall issue and credit an account of an investor, in the manner described in the Fund’s prospectus, once it receives:

 

 

 

 

 

 

(i)

A purchase order in good form;

 

 

 

 

 

 

(ii)

Proper information to establish a shareholder account; and

 

 

 

 

 

 

(iii)

Confirmation of receipt or crediting of funds for such order to the Fund’s transfer agent.

 

 

 

 

 

(c)

Redemption of Shares . PFPC shall process requests to redeem Shares as follows:

 

 

 

 

    (i) All requests to transfer or redeem Shares and payment therefor shall be made in accordance with the Fund’s prospectus, when the shareholder tenders Shares in proper form, accompanied by such documents as PFPC reasonably may deem necessary.

 

 

 

 

 

 

(ii)

PFPC reserves the right to refuse to transfer or redeem Shares until it is satisfied that the endorsement on the instructions is valid and genuine and

11


 

 

 

that the requested transfer or redemption is legally authorized, and it shall incur no liability for the refusal, in good faith, to process transfers or redemptions which PFPC, in its good judgment, deems improper or unauthorized, or until it is reasonably satisfied that there is no basis to any claims adverse to such transfer or redemption.

 

 

 

 

 

 

(iii)

When Shares are redeemed, PFPC shall deliver to the Fund’s custodian (the “Custodian”) and the Fund or its designee a notification setting forth the number of Shares redeemed.  Such redeemed Shares shall be reflected on appropriate accounts maintained by PFPC reflecting outstanding Shares of the Fund and Shares attributed to individual accounts.

 

 

 

 

 

 

(iv)

PFPC shall, upon receipt of the monies provided to it by the Custodian for the redemption of Shares, pay such monies as are received from the Custodian, all in accordance with the procedures established from time to time between PFPC and the Fund.

 

 

 

 

 

 

(v)

When a broker-dealer notifies PFPC of a redemption desired by a customer, and the Custodian provides PFPC with funds, PFPC shall prepare and send the redemption check to the broker-dealer and made payable to the broker-dealer on behalf of its customer, unless otherwise instructed in writing by the broker-dealer.

 

 

 

 

    (vi) PFPC shall not process or effect any redemption requests with respect to Shares of the Fund after receipt by PFPC or its agent of notification of the suspension of the determination of the net asset value of the Fund.
       

 

  (d)

Dividends and Distributions .  Upon a resolution of the Fund’s Board of Trustees

12


 

 

authorizing the declaration and payment of dividends and distributions and Written Instructions to PFPC, PFPC shall issue dividends and distributions declared by the Fund in Shares, or, upon shareholder election, pay such dividends and distributions in cash, if provided for in the Fund’s prospectus.  Such issuance or payment, as well as payments upon redemption as described above, shall be made after deduction and payment of the required amount of funds to be withheld in accordance with any applicable tax laws or other laws, rules or regulations.  PFPC shall mail to the Fund’s shareholders such tax forms and other information, or permissible substitute notice, relating to dividends and distributions paid by the Fund as are required to be filed and mailed by applicable law, rule or regulation. PFPC shall prepare, maintain and file with the IRS and other appropriate taxing authorities reports relating to all dividends above a stipulated amount paid by the Fund to its shareholders as required by tax or other law, rule or regulation.

 

 

 

 

 

 

(e)

Shareholder Account Services .

 

 

 

 

 

(i)

PFPC may arrange, in accordance with the prospectus, for issuance of Shares obtained through:

 

 

 

 

 

 

 

-

Any pre-authorized check plan; and

 

 

 

-

Direct purchases through broker wire orders, checks and applications.

 

 

 

 

 

 

 

 

 

 

 

 

(ii)

PFPC may arrange, in accordance with the prospectus, for a shareholder’s:

 

 

 

 

 

 

 

-

Exchange of Shares for shares of another fund with which the Fund has exchange privileges;

 

 

 

-

Automatic redemption from an account where that shareholder participates in a automatic redemption plan; and/or

      - Redemption of Shares from an account with a checkwriting privilege.
         

 

  (f)

  Communications to Shareholders .  Upon timely Written Instructions, PFPC shall

13


 

 

mail all communications by the Fund to its shareholders, including:

 

 

 

 

 

(i)

Reports to shareholders;

 

 

 

 

 

 

(ii)

Confirmations of purchases and sales of Fund shares;

 

 

 

 

 

 

(iii)

Monthly or quarterly statements;

 

 

 

 

 

 

(iv)

Dividend and distribution notices; and

 

 

 

 

 

 

(v)

Tax form information.

 

 

 

 

 

(g)

Records .  PFPC shall maintain records of the accounts for each shareholder showing the following information:

 

 

 

 

 

(i)

Name, address and United States Taxpayer Identification or Social Security number;

 

 

 

 

 

 

(ii)

Number and class of Shares held and number and class of Shares for which certificates, if any, have been issued, including certificate numbers and denominations;

 

 

 

 

 

 

(iii)

Historical information regarding the account of each shareholder, including dividends and distributions paid and the date and price for all transactions on a shareholder’s account;

 

 

 

 

 

 

(iv)

Any stop or restraining order placed against a  shareholder’s account;

 

 

 

 

 

 

(v)

Any correspondence relating to the current maintenance of a shareholder’s account;

 

 

 

 

 

 

(vi)

Information with respect to withholdings; and

 

 

 

 

 

 

(vii)

Any information required in order for PFPC to perform any calculations required by this Agreement.

       

 

  (h)

  Lost or Stolen Certificates .  PFPC shall place a stop notice against any certificate reported to be lost or stolen and comply with all applicable federal regulatory requirements for reporting such loss or alleged misappropriation.  A new certificate shall be registered and issued only upon:

14


 

 

(i)

The shareholder’s pledge of a lost instrument bond or such other appropriate indemnity bond issued by a surety company approved by PFPC; and

 

 

 

 

 

 

(ii)

Completion of a release and indemnification agreement signed by the shareholder to protect PFPC and its affiliates.

 

 

 

 

 

(i)

Shareholder Inspection of Share Records .  Upon a request from any Fund shareholder to inspect share records, PFPC will notify the Fund and the Fund will issue instructions granting or denying each such request.  Unless PFPC has acted contrary to the Fund’s instructions, the Fund agrees to and does hereby release PFPC from any liability for refusal of permission for a particular shareholder to inspect the Fund’s share records.

 

 

 

 

(j)

Withdrawal of Shares and Cancellation of Certificates .  Upon receipt of Written Instructions, PFPC shall cancel outstanding certificates surrendered by the Fund to reduce the total amount of outstanding shares by the number of shares surrendered by the Fund.

 

 

 

 

(k)

Lost Shareholders .  PFPC shall perform such services as are required in order to comply with rule 17Ad-17 of the 1934 Act (the “Lost Shareholder Rule”), including, but not limited to, those set forth below.  PFPC may, in its sole discretion, use the services of a third party to perform some of or all such services.

 

 

 

 

 

(i)

documentation of search policies and procedures;

 

 

 

 

 

 

(ii)

execution of required searches;

 

 

 

 

    (iii) tracking results and maintaining data sufficient to comply with the Lost Shareholder Rules; and

 

 

 

 

 

 

(iv)

preparation and submission of data required under the Lost Shareholder Rules.

15


 

 

Except as set forth above, PFPC shall have no responsibility for any escheatment services.

 

 

 

 

(l)

Retirement Plans .

 

 

 

 

 

(i)

In connection with the individual retirement accounts, simplified employee pension plans, rollover individual retirement plans, educational IRA’s and ROTH individual retirement accounts (“IRA Plans”), 403(b) Plans and money purchase and profit sharing plans (“Qualified Plans”) (collectively, the “Retirement Plans”) within the meaning of Section 408 of the Internal Revenue Code of 1986, as amended (the “Code”) sponsored by the Fund for which contributions of the Fund’s shareholders (the “Participants”) are invested solely in Shares of the Fund, PFPC shall provide the following administrative services:

 

 

 

 

 

 

 

(A)

Establish a record of types and reasons for distributions (i.e., attainment of age 59-1/2, disability, death, return of excess contributions, etc.);

 

 

 

 

 

 

 

 

(B)

Record method of distribution requested and/or made;

 

 

 

 

 

 

 

 

(C)

Receive and process designation of beneficiary forms requests;

 

 

 

 

 

 

 

 

(D)

Examine and process requests for direct transfers between custodians/trustees, transfer and pay over to the successor assets in the account and records pertaining thereto as requested;

 

 

 

 

 

 

 

 

(E)

Prepare any annual reports or returns required to be prepared and/or filed by a custodian of a Retirement Plan, including, but not limited to, an annual fair market value report, Forms 1099R and 5498; and file same with the IRS and provide same to Participant/Beneficiary, as applicable; and

 

 

 

 

 

 

 

 

(F)

Perform applicable federal withholding and send Participants/Beneficiaries an annual TEFRA notice regarding required federal tax withholding.

 

 

 

 

 

    (ii) PFPC shall arrange for PFPC Trust Company to serve as custodian for the Retirement Plans sponsored by the Fund.
       

 

 

(iii)

With respect to the Retirement Plans, PFPC shall provide the Fund with the associated Retirement Plan documents for use by the Fund and PFPC shall be responsible for the maintenance of such documents in compliance

16


 

 

 

with all applicable provisions of the Code and the regulations promulgated thereunder.

 

 

 

 

(m)

Print Mail . The Fund hereby engages PFPC as its print/mail service provider with respect to those items and for such fees as may be agreed to from time to time in writing by the Fund and PFPC.

 

 

 

 

(n)

Proxy Advantage . The Fund hereby engages PFPC as its proxy solicitation service provider with respect to those items and for such fees as may be agreed to from time to time in writing by the Fund and PFPC.

 

 

 

15.

Duration and Termination . This Agreement shall continue until terminated by the Fund or by PFPC on ninety (90) days’ prior written notice to the other party.  In the event the Fund gives notice of termination, all expenses associated with movement (or duplication) of records and materials and conversion thereof to a successor service provider (and any other service provider(s)), and all trailing expenses incurred by PFPC, will be borne by the Fund.

 

 

16.

Notices .   Notices shall be addressed (a) if to PFPC, at 301 Bellevue Parkway, Wilmington, Delaware 19809, Attention: General Counsel; (b) if to the Fund, at 13455 Noel Road, Suite 800, Dallas, Texas 75240, Attention: Secretary or (c) if to neither of the foregoing, at such other address as shall have been given by like notice to the sender of any such notice by the other party.  If notice is sent by confirming telegram, cable, telex or facsimile sending device, it shall be deemed to have been given immediately.  If notice is sent by first-class mail, it shall be deemed to have been given three days after it has been mailed.  If notice is sent by messenger, it shall be deemed to have been given on the day it is delivered.

17


17.

Amendments .   This Agreement, or any term thereof, may be changed or waived only by a written amendment, signed by the party against whom enforcement of such change or waiver is sought.

 

 

18.

Delegation; Assignment . This Agreement and the rights and duties of the parties herein may not be assigned or delegated by any party without the written consent of each party, except that PFPC may assign or delegate its duties to any majority-owned direct or indirect subsidiary of PFPC or of The PNC Financial Services Group, Inc. upon thirty (30) days’ prior written notice to the Fund.

 

 

19.

Counterparts .   This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

 

 

20.

Further Actions .   Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof.

 

 

21.

Miscellaneous .


 

(a)

Entire Agreement .  This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties may embody in one or more separate documents their agreement, if any, with respect to delegated duties and Oral Instructions.

 

 

 

  (b) Captions .  The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.

 

 

 

 

(c)

Governing Law .  This Agreement shall be deemed to be a contract made in

18


 

 

Delaware and governed by Delaware law, without regard to principles of conflicts of law.

 

 

 

 

(d)

Partial Invalidity .  If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.

 

 

 

 

(e)

Successors and Assigns .  This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.

 

 

 

 

(f)

Facsimile Signatures .  The facsimile signature of any party to this Agreement shall constitute the valid and binding execution hereof by such party.

 

 

 

 

(g)

Privacy.   Each party hereto acknowledges and agrees that, subject to the reuse and re-disclosure provisions of Regulation S-P, 17 CFR Part 248.11, it shall not disclose the non-public personal information of investors in the Fund obtained under this Agreement, except as necessary to carry out the services set forth in this agreement or as otherwise permitted by law or regulation.

 

 

 

 

(h)

The Fund will provide such information and documentation as PFPC may reasonably request in connection with services provided by PFPC to the Fund.

 

 

 

 

(i)

To help the U.S. government fight the funding of terrorism and money laundering activities, U.S. Federal law requires each financial institution to obtain, verify, and record certain information that identifies each person who initially opens an account with that financial institution on or after October 1, 2003. Certain of PFPC and certain of its affiliates are financial institutions, and PFPC may, as a matter of policy, request (or may have already requested) the Fund’s name,

19


 

 

address and taxpayer identification number or other government-issued identification number, and, if such party is a natural person, that party’s date of birth. PFPC may also ask (and may have already asked) for additional identifying information, and PFPC may take steps (and may have already taken steps) to verify the authenticity and accuracy of these data elements.

20


          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.

 

PFPC INC.

 

 

 

 

By:

 

 

 

 

Title:

 

 

 

 

 

 

 

 

HIGHLAND FUNDS I

 

 

 

By:

 

 

 

 

Title:

 

21


AUTHORIZED PERSONS APPENDIX

NAME

 

SIGNATURE

 

 

 

 

_______________________________

 

_______________________________

 

 

 

_______________________________

 

_______________________________

 

 

 

_______________________________

 

_______________________________

 

 

 

_______________________________

 

_______________________________

 

 

 

_______________________________

 

_______________________________

 

 

 

_______________________________

 

_______________________________

 

 

 

_______________________________

 

_______________________________

 

 

 

_______________________________

 

_______________________________

 

 

 

_______________________________

 

_______________________________

 

 

 

_______________________________

 

_______________________________

 

 

 

_______________________________

 

_______________________________

     

22


EXHIBIT A

          THIS EXHIBIT A, dated as of                     , 2006, is Exhibit A to that certain Transfer Agency Services Agreement dated as of                      , 2006, between PFPC Inc. and Highland Funds I.

PORTFOLIOS

HIGHLAND EQUITY OPPORTUNITIES FUND

23


POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each whose name appears below nominates, constitutes and appoints each of R. Joseph Dougherty and M. Jason Blackburn (with full power to each of them to act alone) his true and lawful attorney-in-fact and agent, for him and on his behalf and in his place and stead in any and all capacities, to make, execute and sign all amendments and supplements to the Registration Statement on Form N-1A under the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, of HIGHLAND FUNDS I (the “Trust”), and to file with the Securities and Exchange Commission, and any other regulatory authority having jurisdiction over the offer and sale of shares beneficial interest, par value $.001 per share, of the Trust, and any and all amendments and supplements to such Registration Statement, and any and all exhibits and other documents requisite in connection therewith, granting unto said attorneys and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as the undersigned officers and Trustees themselves might or could do.

IN WITNESS WHEREOF, the undersigned officers and Trustees have hereunto set their hands this 3 rd day of March 2006.

 

/s/ M. JASON BLACKBURN

 

/s/ JAMES D. DONDERO

 

 

 

M. Jason Blackburn

 

James D. Dondero

 

Chief Financial Officer,

 

Chief Executive Officer

 

(Principal Accounting Officer)

 

and President

 

and Secretary

 

 

 

 

 

 

 

 

 

 

 

/s/ R. JOSEPH DOUGHERTY

 

/s/ TIMOTHY K. HUI

 

 

 

R. Joseph Dougherty

 

Timothy K. Hui

 

Trustee

 

Trustee

 

 

 

 

 

 

 

 

 

/s/ SCOTT F. KAVANAUGH

 

/s/ JAMES F. LEARY

 

 

 

Scott F. Kavanaugh

 

James F. Leary

 

Trustee

 

Trustee

 

 

 

 

 

 

 

 

 

/s/ BRYAN A. WARD

 

 

 

 

 

 

Bryan A. Ward

 

 

 

Trustee

 

 

HIGHLAND FUNDS I
on behalf of its series

HIGHLAND EQUITY OPPORTUNITIES FUND

CLASS A SHARES & CLASS C SHARES

RULE 12b-1 DISTRIBUTION PLAN

          Highland Funds I, a Delaware Statutory Trust  (the “Trust”) that engages in business as an open-end management investment company and is registered as such under the Investment Company Act of 1940, as amended (the “Act”), on behalf of its series, Highland Equity Opportunities Fund (the “Fund”), adopts the following distribution plan (the “Plan”) pursuant to Rule 12b-1 (the “Rule”) under the Act for the purpose of providing personal service and/or the maintenance of shareholder accounts and to facilitate the distribution of shares of the Fund.

I.        Service and Distribution Fees

          The Fund shall pay a service fee at the annual rate of 0.25% of the net assets of each of its Class A Shares and Class C Shares and a distribution fee at the annual rates of 0.10% of the average daily net assets of its Class A Shares and 0.75% of the average daily net assets of its Class C Shares.  Such fees shall be accrued daily and paid monthly in arrears (or shall be accrued and paid at such other intervals as the Board may determine).

II.      Payments of Fees under the Plan

          The Fund shall make all payments of service and distribution fees under this Plan to the principal underwriter of the shares of the Fund (the “Distributor”) on the 20th day of each month or, if such day is not a business day, on the next business day thereafter.  The Fund shall not pay, nor shall the Distributor be entitled to receive, any amount under this Plan if such payment would result in the Distributor’s receiving amounts in excess of those permitted by applicable law or by rules of the National Association of Securities Dealers, Inc.

III.     Use of Fees

          The Distributor may pay part or all of the service and distribution fees it receives from the Fund as commissions to financial service firms that sell Fund Shares or as reimbursements to financial service firms or other entities that provide shareholder services to record or beneficial owners of Fund Shares (including third-party administrators of qualified plans).  This provision does not obligate the Distributor to make any such payments nor limit the use that the Distributor may make of the fees it receives.

IV.     Reporting

          The Distributor shall provide to the Fund’s Trustees, and the Trustees shall review, at least quarterly, written reports setting forth all Plan expenditures and the purposes for those


expenditures. Amounts payable under this paragraph are subject to any limitations on such amounts prescribed by applicable laws or rules.

V.      Other Payments Authorized

          Payments by the Fund or the Distributor and its affiliates other than as set forth in Section I which may be indirect financing of distribution costs are authorized by this Plan.

VI.    Conditions to Effectiveness of Plan

          While this Plan is in effect, the Trust shall satisfy the “fund governance standards” as defined in Rule 0-1(a)(7) under the Act. 1  

VII.    Continuation; Amendment; Termination

          This Plan shall continue in effect with respect to a Class of Shares only so long as specifically approved for that Class at least annually as provided in the Rule.  The Plan may not be amended to increase materially the service fee or distribution fee with respect to a Class of Shares without such shareholder approval as is required by the Rule and any applicable orders of the Securities and Exchange Commission, and all material amendments of the Plan must be approved in the manner described in the Rule. The Plan may be terminated with respect to any Class of Shares at any time as provided in the Rule without payment of any penalty.

Adopted: _______________, 2006

1           It should be noted, however, that in August 2005 the Court of Appeals for the District of Columbia Circuit stayed the January 16, 2006 effective date of subparagraphs (i) and (iv) of Rule 0-1(a)(7), which provisions require that a fund Board have at least 75% of its members independent and an independent Board Chairman, respectively.)

HIGHLAND FUNDS I

RULE 18f-3 MULTI-CLASS PLAN

                    This Rule 18f-3 Multi-Class Plan (the “Multi-Class Plan”) is adopted pursuant to Rule 18f-3 under the Act to provide for the issuance and distribution of multiple classes of shares by the Trust in accordance with the terms, procedures and conditions set forth below.  A majority of the Trustees of the Trust, including a majority of the Trustees who are not interested persons of the Trust within the meaning of the Act, have found this Multi-Class Plan, including the expense allocations, to be in the best interests of the Trust and each Class of Shares constituting the Trust.

 

A.

Definitions.   As used herein, the terms set forth below shall have the meanings ascribed to them below.

 

 

 

 

 

 

1.

The Act – the Investment Company Act of 1940, as amended, and the rules and regulations promulgated thereunder.

 

 

 

 

 

 

2.

CDSC – contingent deferred sales charge.

 

 

 

 

 

 

3.

CDSC Period – the period of time following acquisition during which Shares are assessed a CDSC upon redemption.

 

 

 

 

 

 

4.

Class - a class of Shares of the Trust.

 

 

 

 

 

 

5.

Class A Shares – shall have the meaning ascribed in Section B.1.

 

 

 

 

 

 

6.

Class C Shares – shall have the meaning ascribed in Section B.2.

 

 

 

 

 

 

7.

Class Z Shares - shall have the meaning ascribed in Section B.3.

 

 

 

 

 

 

8.

Distribution Expenses – expenses and any element of profit referred to in a Plan of Distribution and/or board resolutions, incurred in activities that are primarily intended to result in the distribution and sale of Shares.

 

 

 

 

 

 

9.

Distribution Fee – a fee paid by the Trust in respect of the asset of a Class of the Trust to the Distributor pursuant to the Plan of Distribution relating to the Class.

 

 

 

 

 

 

10.

Distributor – PFPC Distributors, Inc.

 

 

 

 

 

 

11.

NASD - National Association of Securities Dealers, Inc.

 

 

 

 

 

 

12.

Plan of Distribution – any plan adopted under Rule 12b-1 under the Act with respect to payment of a Distribution Fee.

1


 

 

13.

Prospectus – the prospectus, including the statement of additional information incorporated by reference therein, covering the Shares of the referenced Class or Classes of the Trust.

 

 

 

 

 

 

14.

SEC – Securities and Exchange Commission.

 

 

 

 

 

 

15.

Service Fee – a fee paid to financial intermediaries, including the Distributor and its affiliates, for the ongoing provision of personal services to shareholders of a Class and/or the maintenance of shareholder accounts relating to a Class.

 

 

 

 

 

 

16.

Share – a share of beneficial interest in the Trust.

 

 

 

 

 

 

17.

Trust – Highland Funds I

 

 

 

 

 

 

18.

Trustees – the Trustees of the Trust.

 

 

 

 

 

B.

Classes.   The Trust may offer three Classes in one or more sub-trusts as follows:

 

 

 

 

 

 

1.

Class A Shares .  Class A Shares means Class A Shares of the Trust.  Class A Shares shall be offered at net asset value plus a front-end sales charge set forth in the Prospectus from time to time, which may be reduced or eliminated in any manner not prohibited by the Act or the NASD as set forth in the Prospectus.  Class A Shares that are not subject to a front-end sales charge as a result of the foregoing may be subject to a CDSC for the CDSC Period set forth in Section D.1.  The offering price of Class A Shares subject to a front-end sales charge shall be computed in accordance with the Act.  Class A Shares shall be subject to ongoing Distribution Fees or Service Fees approved from time to time by the Trustees and set forth in the Prospectus.

 

 

 

 

 

 

2.

Class C Shares .  Class C Shares means Class C Shares of the Trust.  Class C Shares shall be (1) offered at net asset value, (2) subject to a CDSC for the CDSC Period set forth in Section D.1. and (3) subject to ongoing Distribution Fees and Service Fees approved from time to time by the Trustees and set forth in the Prospectus.

 

 

 

 

 

 

3.

Class Z Shares .  Class Z Shares means Class Z Shares of the Trust.  Class Z shares shall be (1) offered at net asset value, (2) sold without a front-end sales load or CDSC, and (3) offered to certain institutions and other eligible investors purchasing the minimum amount of Shares as set forth in the Prospectus.

 

 

 

 

 

C.

Rights and Privileges of Classes.  Each of the Class A Shares, Class C Shares and Class Z Shares will represent an interest in the same portfolio of assets and will have identical voting, dividend, liquidation and other rights, preferences, powers, restrictions, limitations, qualifications, designations and terms and conditions, except as described otherwise in the Trust’s Agreement and

2


 

 

Declaration of Trust with respect to each of such Classes and in Sections H and I of this Multi-Class Plan.

 

 

 

 

 

D.

CDSC.  A CDSC may be imposed upon redemption of Class A Shares that do not incur a front end sales charge and upon redemption of Class C Shares, subject to the following conditions:

 

 

 

 

 

 

1.

CDSC Period .  The CDSC Period for Class A Shares shall be 18 months, and the CDSC Period for Class C Shares shall be one year.  Each of these periods begins on the day on which the purchase was made.

 

 

 

 

 

 

2.

CDSC Rate .  The CDSC rate shall be recommended by the Distributor and approved by the Trustees.  If a CDSC is imposed for a period greater than 13 months, in each succeeding 12 months of the CDSC Period (after the first 12 months, plus any initial partial month) the CDSC rate must be less than or equal to the CDSC rate in the preceding 12 months (plus any initial partial month).

 

 

 

 

 

 

3.

Disclosure and changes .  The CDSC rates and CDSC Period shall be disclosed in the Prospectus and may be decreased at the discretion of the Distributor, but may not be increased unless approved as set forth in Section M.

 

 

 

 

 

 

4.

Method of calculation .  The CDSC shall be assessed on an amount equal to the lower of the net asset value at the time of purchase or redemption.  No CDSC shall be assessed on Shares derived from reinvestment of dividends or capital gains distributions.  The order in which Class A Shares and Class C Shares are to be redeemed when not all of such Shares would be subject to a CDSC shall be as determined by the Distributor in accordance with the provisions of Rule 6c-10 under the Act.

 

 

 

 

 

 

5.

Waiver .  The Distributor may in its discretion waive a CDSC otherwise due upon the redemption of Shares of any Class under circumstances previously approved by the Trustees and disclosed in the Prospectus and as allowed under Rule 6c-10 under the Act.

 

 

 

 

 

 

6.

Calculation of offering price .  The offering price of Shares of any Class subject to a CDSC shall be computed in accordance with Rule 22c-1 under the Act and Section 22(d) of the Act and the rules and regulations thereunder.

 

 

 

 

 

 

7.

Retention by Distributor .  The CDSC paid with respect to Shares of any Class may be retained by the Distributor to reimburse the Distributor for commissions paid by it in connection with the sale of Shares subject to a CDSC and for Distribution Expenses.

 

 

 

 

 

E.

Service and Distribution Fees.  Class A Shares shall be subject to a Distribution Fee not in excess of 0.10% per annum of the average daily net assets of the Class

3


 

 

and a Service Fee not in excess of 0.25% of the average daily net assets of the Class.  Class C Shares shall be subject to a Distribution Fee not in excess of 0.75% per annum of the average daily net assets of the Class and a Service Fee not in excess of 0.25% of the average daily net assets of the Class.  All other terms and conditions with respect to Service Fees and Distribution Fees shall be governed by the plans adopted by the Trust with respect to such fees and Rule 12b-1 of the Act.

 

 

 

 

 

F.

Allocation of Liabilities, Expenses, Income and Gains Among Classes.

 

 

 

 

 

 

1.

Liabilities and Expenses applicable to a particular Class .  Each Class of the Trust shall pay any Distribution Fee and Service Fee applicable to that Class.  Other expenses applicable to any of the foregoing such as incremental transfer agency fees, but not including advisory or custodial fees or other expenses related to the management of the Trust’s assets, shall be allocated among such Classes in different amounts in accordance with the terms of each such Class if they are actually incurred in different amounts by such Classes or if such Classes receive services of a different kind or to a different degree than other Classes.

 

 

 

 

 

 

2.

Income, losses, capital gains and losses, and liabilities and other expenses applicable to all Classes .  Income, losses, realized and unrealized capital gains and losses, and any liabilities and expenses not applicable to any particular Class shall be allocated to each Class on the basis of the net asset value of that Class in relation to the net asset value of the Trust.

 

 

 

 

 

 

3.

Determination of nature of items .  The Trustees shall determine in their sole discretion whether any liability, expense, income, gain or loss other than those listed herein is properly treated as attributed in whole or in part to a particular Class or all Classes.

 

 

 

 

 

G.

Exchange Privilege.  Holders of Class A Shares, Class C Shares and Class Z Shares shall have such exchange privileges as set forth in the Prospectus for such Class.  Exchange privileges may vary among Classes and among holders of a Class.

 

 

 

 

 

H.

Voting Rights of Classes.

 

 

 

 

 

 

1.

Shareholders of each Class shall have exclusive voting rights on any matter submitted to them that relates solely to the arrangement of that Class; and

 

 

 

 

 

 

2.

Shareholders of each Class shall have separate voting rights on any matter submitted to them in which the interests of one Class differ from the interests of any other Class.

 

 

 

 

 

I.

Dividends and Distributions.  Dividends and capital gain distributions paid by the Trust with respect to each Class, to the extent any such dividends

4


 

 

distributions are paid, will be calculated in the same manner and at the same time on the same day and will be, after taking into account any differentiation in expenses allocable to a particular Class, in substantially the same proportion on a relative net asset value basis.

 

 

 

 

 

J.

Redemption Fees.   In addition to any CDSC charged on Class A Shares and Class C Shares, as detailed above, generally Shares of each Class held for less than two months are redeemable (or exchangeable) at a price equal to 98% of the sub-trust’s then-current net asset value per Share, less any applicable CDSC, all as described in the Prospectus.  This 2.00%] redemption fee directly affects the amount a shareholder who is subject to the fee receives upon redemption or exchange.  The redemption fee is paid to the sub-trust and is designed to offset the brokerage commissions, capital gains impact, and administrative and other costs associated with fluctuations in its asset levels and cash flow caused by short-term shareholder trading.  The redemption fee does not apply to certain transactions described in the Prospectus.

 

 

 

 

 

K.

Reports to Trustees.  The Distributor shall provide the Trustees such information as the Trustees may from time to time deem to be reasonably necessary to evaluate this Multi-Class Plan.

 

 

 

 

 

L.

Conditions to Effectiveness of this Multi-Class Plan.   While this Plan is in effect, the Trust shall satisfy the “fund governance standards” as defined in Rule 0-1(a)(7) under the Act. 1

 

 

 

 

 

M.

Amendment.  Any material amendment to this Multi-Class Plan shall be approved by the affirmative vote of a majority (as defined in the Act) of the Trustees of the Trust, including the affirmative vote of the Trustees of the Trust who are not interested persons of the Trust, except that any amendment that increases the CDSC rate schedule or CDSC Period must also be approved by the affirmative vote of a majority of the Shares of the affected Class.  Except as so provided, no amendment to this Multi-Class Plan shall be required to be approved by the shareholders of any Class of the Shares constituting the Trust.  The Distributor shall provide the Trustees such information as may be reasonably necessary to evaluate any amendment to this Multi-Class Plan.

 

 

 

 

Adopted: ___________, 2006


1

It should be noted, however, that in August 2005 the Court of Appeals for the District of Columbia Circuit stayed the January 16, 2006 effective date of subparagraphs (i) and (iv) of Rule 0-1(a)(7), which provisions require that a fund Board have at least 75% of its members independent and an independent Board Chairman, respectively.)

5

PROSPECT STREET ® FUNDS
HIGHLAND MASTER PORTFOLIOS
HIGHLAND FUNDS

CODE OF ETHICS

A.  Legal Requirement .

                    Rule 17j-1(b) under the Investment Company Act of 1940, as amended (the “1940 Act”), makes it unlawful for any Director or officer of the Funds, or of Highland, as well as certain other persons, in connection with the purchase or sale by such person of a security “held or to be acquired” by the Fund:

 

(1)           To employ any device, scheme or artifice to defraud the Fund;

 

(2)          To make any untrue statement of a material fact to the Fund or omit to state a material fact necessary in order to make the statements made to the Fund, in light of the circumstances under which they are made, not misleading;

 

(3)           To engage in any act, practice or course of business that operates or would operate as a fraud or deceit on the Fund; or

 

(4)           To engage in any manipulative practice with respect to the Fund.

                    A security is “held or to be acquired” by the Fund if within the most recent 15 days it (i) is or has been held by the Fund, or (ii) is being or has been considered by the Fund or Highland for purchase by the Fund. A security “held or to be acquired” by the Fund also includes any option to purchase or sell, and any security convertible into or exchangeable for, a security described in the preceding sentence. A purchase or sale of a security includes, among other things, the writing of an option to purchase or sell a security.

B.  Fund Policy .

                    It is the policy of the Fund that no “access person” 5 of the Fund or of Highland shall engage in any act, practice or course of conduct that would violate the provisions of Rule 17j-1(b) set forth above.

5

An “access person” is each board member, officer or “advisory person” of the Fund or Highland (hereinafter, “Access Person”). An “advisory person” is any director, officer or employee of the Fund or Highland (or of a company in a control relationship to the Fund or Highland) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a security by the Fund, or whose functions relate to the making of any recommendations with respect to such purchases or sales, and any natural person in a control relationship to the Fund or Highland who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of a security by the Fund.

 

 

  C.

Procedures .

 

 


 

 

1.

To provide the Fund with information to enable it to determine with reasonable assurance whether the provisions of Rule 17j-l(b) are being observed:

 

 

 

 

(a)

Within 10 days of becoming an Access Person, all Access Persons (other than board members who are not “interested persons” (as defined in the 1940 Act) of the Fund) must submit to the Fund’s Chief Compliance Officer (the “Chief Compliance Officer”) a statement of all securities in which such Access Person has any direct or indirect beneficial ownership. 6 This statement must include (i) the title, number of shares and principal amount of each reportable security in which the Access Person had any direct or indirect beneficial ownership when the person became an Access Person, (ii) the name of any broker, dealer or bank with whom the Access Person maintained an account in which any securities were held for the direct or indirect benefit of such Access Person as of the date the person became an Access Person and (iii) the date of submission by the Access Person. This statement also must be submitted by all new Fund employees who are Access Persons upon their employment by the Fund.

 

 

 

 

(b)

When an account is established by an Access Person (other than board members who are not “interested persons” (as defined in the 1940 Act) of the Fund) in which any securities were held during a quarter for the direct or indirect benefit of the Access Person such Access Person is required to send written notification (which include email notification) of such fact to the Chief Compliance Officer before engaging in any personal securities transactions through such account, but in any event within 30 days of the end of the calendar quarter in which the account was opened. Such report must include (i) the name of the broker, dealer or bank with whom the Access Person established the account, (ii) the date the account was established and (iii) the date the report was submitted by the Access Person. A letter in the form annexed hereto as Appendix A will be sent to the broker-dealer involved, allowing such Access Person to maintain the

 

 

 

6

“Beneficial ownership” of a security is determined in the same manner as it would be for purposes of Section 16 of the Securities Exchange Act of 1934, except that such determination should apply to all securities. Generally, you should consider yourself the beneficial owner of securities held by your spouse, your minor children, a relative who shares your home, or other persons if, by reason of any contract, understanding, relationship, agreement or other arrangement, you obtain from such securities benefits substantially equivalent to those of ownership. You should also consider yourself the beneficial owner of securities if you can vest or revest title in yourself, now or in the future. Any report by an Access Person required under this Code of Ethics may contain a statement that the report will not be construed as an admission that the person making the report has any direct or indirect beneficial ownership in the security to which the report relates.

 

 


 

 

account and directing that duplicate confirmations of transactions in the account be sent to the Chief Compliance Officer.

 

 

 

 

(c)

Investment personnel 7 are prohibited from engaging in any personal securities transaction involving “reportable securities” without obtaining prior written approval from the Chief Compliance Officer.

 

 

 

 

(d)

In connection with any decision by the Chief Compliance Officer to approve transactions by investment personnel acquiring direct or indirect beneficial ownership in any securities in an initial public offering or a limited offering (i.e., an offering exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) or 4(6) or Rule 504, 505 or 506 thereunder), the Chief Compliance Officer will prepare a report of the decision that takes into account, among other factors, whether the investment opportunity should be reserved for the Fund and its shareholders, and whether the opportunity is being offered to an individual by virtue of his or her position with the Fund. Any investment personnel receiving approval from the Chief Compliance Officer to acquire securities in an initial public offering or a limited offering must disclose that investment when they participate in the Fund’s subsequent consideration of an investment in such issuer and any decision by the Fund to invest in such issuer will be subject to an independent review by investment personnel with no personal interest in the issuer.

 

 

 

 

(e)

Each portfolio manager 8 is prohibited from buying or selling a security within at least seven calendar days before and after the Fund trades in that security. The portfolio manager will be required to disgorge to the Fund any profits realized on trades within the proscribed periods.

 

 

 

 

(f)

All investment personnel and any other Access Persons who obtain information concerning recommendations made to the Fund with regard to the purchase or sale of a security are prohibited from

 

 

 

7

“Investment personnel” is any employee of the Fund or Highland (or of any company in a control relationship to the Fund or Highland) who, in connection with his or her regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of securities by the Fund, and any natural person who controls the Fund or Highland and who obtains information concerning recommendations made to the Fund regarding the purchase or sale of securities by the Fund

 

 

8

“Portfolio manager” is an Access Person entrusted with direct responsibility and authority to make investment decisions affecting the Fund.

 

 


 

 

engaging in any personal securities transaction on a day the Fund has a pending “buy” or “sell” order involving the same security until the Fund’s order is executed or withdrawn.

 

 

 

 

(g)

Each Access Person shall submit reports in the form attached hereto as Exhibit B to the Chief Compliance Officer, showing all transactions in “reportable securities” in which the person has, or by reason of such transaction acquires, any direct or indirect “beneficial ownership.” Such reports shall be filed no later than 30 days after the end of each calendar quarter, but need not show transactions over which such person had no direct or indirect influence or control or with respect to transactions pursuant to an Automatic Investment Plan. 9 An Access Person need not make a quarterly transaction report under this Section if the report would duplicate information contained in broker trade confirmations or account statements received by the Chief Compliance Officer with respect to the Access Person in the time period required above, if all information required to be in the quarterly transaction report is contained in the broker trade confirmations or account statements.

 

 

 

 

(h)

Each Access Person, other than a board member who is not an “interested person” (as defined in the 1940 Act) of the Fund, shall submit an annual report in the form attached hereto as Exhibit C to the Chief Compliance Officer, showing as of a date no more than 45 days before the report is submitted (1) all holdings in “reportable securities” in which the person had any direct or indirect “beneficial ownership” and (2) the name of any broker, dealer or bank with whom the person maintains an account in which any securities are held for the direct or indirect benefit of the Access Person.

 

 

 

 

(i)

Each board member who is not an “interested person” (as defined in the 1940 Act) of the Fund shall not be required to submit the quarterly report required under subparagraph (g), unless during the quarter said board member engaged in a transaction in a “reportable security” when he or she knew or, in the ordinary course of fulfilling his other official duties as a Fund board member, should have known that during the 15-day period immediately before or after the date of the transaction, the Fund purchased or sold, or considered for purchase or sale, the security.

 

 

 

9

“Automatic Investment Plan” means a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation. An Automatic Investment Plan includes a dividend reinvestment plan.


 

(j)

All investment personnel are prohibited from receiving a gift or other personal items of more than de minimis value from any person or entity that does business with or on behalf of the Fund.

 

 

 

 

(k)

Investment personnel must receive authorization from the Chief Compliance Officer prior to serving as a board member of any publicly-traded company. Authorization will be based upon a determination that the board service would be consistent with the interests of the Fund and its shareholders. Any investment personnel serving as a board member of a publicly-traded company will be excluded from any investment decisions by the Fund regarding such company.

 

 

 

 

(l)

All Access Persons are required to certify annually to the Chief Compliance Officer that they have (i) read and understand this Code of Ethics and recognize that they are subject to its terms and conditions, (ii) complied with the requirements of this Code of Ethics and (iii) disclosed or reported all personal securities transactions required to be disclosed or reported pursuant to this Code of Ethics. A form of certification is annexed hereto as Appendix D.

 

 

 

                    In accordance with Rule 17j-1, “reportable securities” do not include direct obligations of the United States Government, bankers’ acceptances, bank certificates of deposit, commercial paper, high quality short-term debt instruments, 10 repurchase agreements and shares of registered open-end investment companies. Further, in light of the investment objectives and policies of the Fund, the Fund’s Board does not believe that transactions by its Access Persons in any securities other than the securities which the Fund is permitted to purchase would be prohibited by Rule 17j-1. Accordingly, a “reportable security” does not include securities which the Fund is not permitted to acquire under its investment objective and policies set forth in its then-current prospectus under the Securities Act of 1933. If the investment objective and policies of the Fund change in the future, the Fund’s Board will reconsider the scope of this reporting requirement in light of such change and Rule 17j-1.

                    2.          The Chief Compliance Officer shall notify each Access Person of the Fund who may be required to make reports pursuant to this Code that such person is subject to its reporting requirements and shall deliver a copy of this Code to each such person. Each Access Person must read (and acknowledge that he or she has done so on the form annexed hereto as Appendix E) and must retain this Code.


10

“High quality short-term debt instruments” means any instrument that has a maturity at issuance of less than 366 days and that is rated in one of the two highest rating categories by a Nationally Recognized Statistical Rating Organization.

 

 


                    3.          Highland shall adopt, maintain and enforce a separate code of ethics with respect to its personnel who are access persons in compliance with Rule 17j-1, and shall forward to the Chief Compliance Officer copies of the code, all future amendments and modifications thereto, the names of all persons who are now or hereafter required to report their securities transactions pursuant to the code, and a copy of each report submitted by such persons. To the extent any Access Persons of the Fund are subject to the code of ethics adopted pursuant to Rule 17j-1 by Highland, the reporting procedures under this Code of Ethics shall not apply to such Access Persons.

 

 

 

 

4.

The Chief Compliance Officer shall:

                                 (a)          review all reports required to be made by the Fund’s Access Persons pursuant to this Code;

                                 (b)          maintain copies of the code of ethics adopted by Highland pursuant to Rule 17j-1 and the names of the persons who are required to report their securities transactions pursuant to such code;

                                 (c)          receive and review copies of all reports to be made under the code of ethics adopted by Highland in compliance with Rule 17j-1;

                                 (d)          submit to the Fund’s Board at its regularly scheduled quarterly meeting a written report listing (i) the names of those persons who were required to submit reports for the prior quarter under this Code or the code of ethics adopted by Highland but failed to and (ii) any reported securities transaction that occurred during the prior quarter that may have been inconsistent with the provisions of this Code or the code of ethics adopted by Highland; and

                                 (e)          promptly investigate any securities transaction listed pursuant to subparagraph (d)(ii) above and submit periodic status reports with respect to each such investigation to the Fund’s Board.

 

 

 

                    5.          At least once a year, the Fund and Highland each must provide the Fund’s Board with a written report that (i) describes issues that arose during the previous year under its respective code of ethics, including information about material code violations and sanctions imposed in response to these material violations, and (ii) certifies to the Fund’s Board that the Fund and Highland, as the case may be, has adopted procedures reasonably necessary to prevent Access Persons from violating its code of ethics. A copy of each report required by this Section must be preserved with the Fund’s records for the period required by Rule 17j-1.

 

 

 

                    6.          The Fund’s Board shall oversee the operation of this Code and review with the Chief Compliance Officer, counsel to the Fund and, if appropriate, representatives of Highland, the reports provided to it pursuant to the immediately preceding paragraph and possible violations of this Code and the code of ethics adopted by Highland in compliance with Rule 17j-1. The Fund’s Board shall consider what sanctions, if any, should be imposed.

 

 

 


                    7.          Before approving material changes to codes of ethics of Highland, the Board shall receive a certification from Highland that it has adopted procedures reasonably necessary to prevent its access persons from violating its code of ethics. The Fund’s Board, including a majority of those board members who are not “interested persons” (as defined in the 1940 Act) of the Fund, shall approve material changes to Highland’s code no later than six months after adoption of such changes.

 

 

 

                    8.          This Code, a copy of each report by an Access Person, a record of all persons, currently or within the past five years, who are or were required to make reports under the Code, or who are or were responsible for reviewing these reports, a record of any decision, and the reasons supporting the decision, to approve the acquisition by investment personnel of securities under Section C.1(d) of the Code, a record of any Code violation and any action taken as a result of the violation must be preserved with the Fund’s records for the period required by Rule 17j-1.

 

 

 

As Revised: March 4, 2005


APPENDIX A

Date

Contact:
Broker/Dealer:
Telephone:
Address:

Re: ______________________________________(Access Person’s Name)

Dear_________:

We have been informed that _____________, [state title] of_____________(the “Fund”)
who is involved with the Fund’s investment activities is maintaining an account with
__________________________________.

Account Numbers:



This letter will serve to inform you that we do not object to the maintenance of this account, provided that you promptly send duplicate copies of all confirmations and statements to the undersigned marked “Personal and Confidential.”

Sincerely yours,

Michael S. Minces
Chief Compliance Officer
[FUND]


APPENDIX B

QUARTERLY PERSONAL INVESTMENT REPORT

Date of Report: _________

To: Chief Compliance Officer

From: ____________

Date of Transaction: __________________

Name of Security: _______________

Interest Rate and Maturity Date (As Applicable): _________________

Number of Shares: ___________________________________

Principal Amount ($): _____________________________

Price Per Share ($): _______________________________

Purchase: ______ Sale: ______ Other: _______________

Name of Broker, Dealer or Bank with or through which the Transaction was effected: ________________________

Comments:

 

Signature: ______________

Approved By: ______________


APPENDIX C

ANNUAL PERSONAL HOLDINGS REPORT*

Date of Report:        ___________________

To:                        Chief Compliance Officer

From:                    ___________________________________

 

Name of Security

Number of Shares

Principal Amount($)

 

 

 






Names of Brokers, Dealers or Banks with whom you maintain an Account in which any Securities are held for your direct or indirect benefit:

Signature:        _____________________________

Approved By:  _____________________________




* Information must be current as of a date no more than 30 days before this report is submitted.


APPENDIX D

ANNUAL CERTIFICATION OF COMPLIANCE
WITH THE CODE OF ETHICS

I certify that:

1.

I have read and understand the Code and recognize that I am subject to its terms and conditions.

 

 

2.

During the past year, I have complied with the Code’s procedures.

 

 

3.

During the past year, I have disclosed or reported all personal securities transactions required to be disclosed or reported pursuant to the Code’s procedures.

 

 


 

 

Signature

 

 

 

 

Dated: __________________________

 

Print Name

 

 


APPENDIX E

ACKNOWLEDGMENT

                    I certify that I have read and understand the Code of Ethics of [FUND] and recognize that I am subject to its terms and conditions. I have disclosed all reported personal securities transactions required to be disclosed or reported pursuant to the Code’s procedures and will continue to do so.

 

NAME

 

DATE

PROSPECT MANAGEMENT ADVISERS, L.P.

CODE OF ETHICS AND POLICY AND PROCEDURES
DESIGNED TO DETECT AND PREVENT INSIDER TRADING
AND TO COMPLY WITH RULE 204A-1 UNDER THE
INVESTMENT ADVISERS ACT OF 1940, AS AMENDED

INTRODUCTION

          Prospect Management Advisers, L.P. (the “Company”) maintains a policy of strict compliance with the highest standards of ethical business conduct and the provisions of applicable federal securities laws, including rules and regulations promulgated by the Securities and Exchange Commission (the “SEC”).  This Code of Ethics applies to each employee of the Company (“Employee”) and other “Covered Persons” (defined below) as specified herein.  It is designed to ensure compliance with legal requirements and the Company’s standards of business conduct.  Employees shall read and understand this Code of Ethics and uphold the standards in the Code of Ethics in their day-to-day activities at the Company.

          This Code of Ethics does not address every possible situation that may arise, consequently every Employee is responsible for exercising good judgment, applying ethical principles, and bringing violations or potential violations of this Code of Ethics to the attention of Scott Johnson (972) 383-8010 or any person who, in the future, may be designated as the Company’s chief compliance officer (the “Chief Compliance Officer”).  Any questions regarding the Company’s policy and procedures should be referred to the Chief Compliance Officer.

          The Company must distribute this Code of Ethics, and any amendments, to each Covered Person, and each Covered Person must read (and acknowledge that he or she has done so on the form attached hereto as Appendix A ) and must retain this Code of Ethics. 5 Such signed acknowledgement should be immediately returned the Chief Compliance Officer.

I.

GENERAL STANDARDS OF CONDUCT

 

 

 

 

A.

General

 

 

 

 

The following general principles guide the Company’s corporate conduct:

 

 

 

 

•

The Company will act in accordance with applicable laws and regulations. 6

 

5           Covered Persons who are not Employees are signing Appendix A only with respect to provisions applicable to Covered Persons as specified in this Code of Ethics.

 

6           Including the Securities Act of 1933, as amended (the “Securities Act”), the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act of 2002, the Investment Company Act of 1940, as amended (the “1940 Act”), the Investment Advisers Act of 1940, as amended (the “Advisers Act”), Title V of the Gramm-Leach-Bliley Act, any rules adopted by the Securities and Exchange Commission (the “SEC”) under any of these statutes, the Bank Secrecy Act, as it applies to investment advisers, and any rules adopted thereunder by the SEC or the Department of the Treasury (collectively, “federal securities laws”).

1


 

•

The Company will provide products and services designed to help the Company’s clients (each, a “Client”) achieve their financial goals.

 

 

 

 

•

The Company will act in accordance with its fiduciary obligations to Clients and place interests of Clients before those of the Company or its Employees.

 

 

 

 

•

The Company will conduct business fairly, in open competition.

 

 

 

 

•

The Company will provide employment opportunities without regard to race, color, sex, pregnancy, religion, age, national origin, ancestry, citizenship, disability, medical condition, marital status, sexual orientation, veteran status, political affiliation, or any other characteristic protected by federal or state law.

 

 

 

 

•

The Company will support the communities in which we operate.

 

 

 

 

B.

Individual Conduct

 

 

 

          The following general principles guide the individual conduct of each Employee and other Covered Persons:

 

 

 

 

•

The Covered Person will not take any action that will violate any applicable laws or regulations, including all federal securities laws.

 

 

 

 

•

The Covered Person will adhere to the highest standards of ethical conduct.

 

 

 

 

•

The Covered Person will maintain the confidentiality of all information obtained in the course of employment with the Company.

 

 

 

 

•

The Covered Person will bring any issues reasonably believed to place the Company at risk to the attention of the Chief Compliance Officer.

 

 

 

 

•

The Covered Person will not abuse or misappropriate the Company’s, or any Client’s, assets or use them for personal gain.

 

 

 

 

•

The Covered Person will not engage in any activities that create an actual or potential conflict of interest between the Covered Person, the Company and/or any Client.

 

 

 

 

•

The Covered Person will deal fairly with Clients and other Covered Persons and will not abuse the Covered Person’s position of trust and responsibility with Clients or take inappropriate advantage of his or her position with the Company.

 

 

 

 

•

The Covered Person will comply with this Code of Ethics.

2


II.

ETHICAL BUSINESS PRACTICES

 

 

 

 

A.

Compliance With Laws and Regulations

          It is the policy of the Company that any violation of applicable laws, regulations or this Code of Ethics shall be immediately reported to the Chief Compliance Officer.  An Employee must not conduct individual investigations, unless authorized to do so by the Chief Compliance Officer.  If an Employee who, in good faith, raises an issue regarding a possible violation of law, regulation or Company policy or any suspected illegal or unethical behavior, such Employee will be protected from retaliation.

 

B.

Falsification or Alteration of Records

          Falsifying or altering records or reports, preparing records or reports that do not accurately or adequately reflect the underlying transactions or activities, or knowingly approving such conduct is prohibited.  Examples of prohibited financial or accounting practices include:

 

•

Making false or inaccurate entries or statements in any Company or Client books, records, or reports that intentionally hide or misrepresent the true nature of a transaction or activity.

 

 

 

 

•

Manipulating books, records, or reports for personal gain.

 

 

 

 

•

Failing to maintain books and records that completely, accurately, and timely reflect all business transactions.

 

 

 

 

•

Maintaining any undisclosed or unrecorded Company or Client funds or assets.

 

 

 

 

•

Using funds for a purpose other than the described purpose.

 

 

 

 

•

Making a payment or approving a receipt with the understanding that the funds will be, or have been, used for a purpose other than what is described in the record of the transaction.

 

 

 

 

C.

Political Contributions

          No Company funds, merchandise, or service may be paid or furnished, directly or indirectly, to a political party, committee, organization or to a political candidate or incumbent, except if legally permissible and if approved in advance in writing by the Chief Compliance Officer.  This Code of Ethics does not apply to or restrict the ability of any Employee to participate voluntarily in political activities on their own personal time or to make personal contributions.  However, the Company is prohibited from reimbursing any Employee for political contributions made from such individual’s personal funds.

 

D.

Payments to Government Officials or Employees

          Company funds or gifts may not be furnished, directly or indirectly, to a government official, government employee or politician for the purpose of obtaining or maintaining business

3


on behalf of the Company.  Such conduct is illegal and may violate federal and state criminal laws.  Assistance or entertainment provided to any government office should never, in form or substance, compromise the Company’s arms-length business relationship with the government agency or official involved.

 

E.

Competition and Fair Dealing

          The Company seeks to outperform its competition fairly and honestly.  The Company seeks competitive advantages through superior performance, not through unethical or illegal business practices.  Stealing proprietary information, possessing trade secret information obtained without the owner’s consent, or inducing such disclosures by past or present employees of other companies is prohibited.  Each Employee should endeavor to respect the rights of and deal fairly with the Clients, vendors, service providers, suppliers, and competitors.  No Employee should, in connection with any Company business, take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other intentional unfair dealing practice.  Employees should not falsely disparage or make unfair negative comments about the Company’s competitors or their products and services.  Negative public statements concerning the conduct or performance of any former Employee of the Company should also be avoided.

 

F.

Privacy of Personal Information

          The Company will acquire and retain only personal information that is required for the effective operation of the business of the Company or that is required by law in the jurisdictions in which the Company operates.  Access to such information will be restricted internally to those with a legitimate need to know.  Employee communications transmitted by the Company’s systems are not considered private.

III.

PROTECTION OF PROPRIETARY AND CONFIDENTIAL INFORMATION

 

 

 

 

A.

Confidentiality of Company Information

          Information generated in the Company is a valuable company asset.  Protecting this information plays a vital role in the Company’s continued growth and ability to compete.  Such information includes among other things, technical information such as computer programs and databases, business information such as the Company’s objectives and strategies, trade secrets, processes, analysis, charts, drawings, reports, sales, earnings, forecasts, relationships with Clients, marketing strategies, training materials, Employee compensation and records, and other information of a similar nature.  Employees must maintain the confidentiality of the Company’s proprietary and confidential information and must not use or disclose such information without the express consent of the Chief Compliance Officer or when legally mandated.  Adhering to this principle is a condition of continued service or employment.

 

B.

Confidentiality of Investor Information

          As a registered investment adviser, we have particular responsibilities for safeguarding our investors’ information and the proprietary information of the Company.  Employees should be mindful of this obligation when using the telephone, fax, telex, electronic mail, and other

4


electronic means of storing and transmitting information.  Employees should not discuss confidential information in public areas, read confidential documents in public places, or leave or discard confidential documents where they can be retrieved by others.

          Information concerning the identity of investors and their transactions and accounts is confidential.  Such information may not be disclosed to persons within the Company except as they may need to know it in order to fulfill their responsibilities to the Company.  You may not disclose such information to anyone or any firm outside the Company unless (i) the outside firm requires the information in order to perform services for the Company and is bound to maintain its confidentiality; (ii) when the Client has consented or been given an opportunity to request that the information not be shared; (iii) as required by law; or (iv) as authorized by the Chief Compliance Officer.  For a more detailed discussion regarding the safekeeping of Client and Company information, see “Procedures for Safeguarding Client Information,” attached as Annex I to the Company’s Compliance Manual.

          Information regarding investor orders must not be used in any way to influence trades in personal accounts or in the accounts of other Clients, including those of other Employees.  Intentionally trading ahead of a Client’s order with the purpose of benefiting on the trade as a result of the Client’s follow-on trade is known as “frontrunning” and is prohibited.  Similarly, intentionally following a Client’s order with Employee trading activity for a similar purpose is known as “piggybacking” or “shadowing” and is likewise prohibited.  Certain six-month short-swing transactions (e.g., a sale and a purchase, or a purchase and a sale, occurring within a six-month period) are also prohibited.  If you reasonably believe improper trading in personal or Client accounts has occurred, you must report such conduct to the Chief Compliance Officer.

IV.

PROHIBITION AGAINST INSIDER TRADING

 

 

 

 

 

A.

Policy Statement on Insider Trading

 

 

 

 

 

 

1.

General

          The Company forbids any Employee or other Access Person (as defined herein) (each, a “Covered Person”) from trading, either personally or on behalf of others, including private investment funds and private accounts advised by the Company (each, a “Client Account”), on material non-public information or communicating material non-public information to others in violation of the law.  This conduct is frequently referred to as “insider trading.” The Company’s policy extends to activities within and outside each Covered Person’s duties at the Company.

          The term “insider trading” is not defined in the federal securities laws, but generally is used to refer to the use of material non-public information to trade in securities (whether or not one is an “insider”) or to communications of material non-public information to others.

          While the law concerning insider trading is not static, it is generally understood that the law prohibits:

 

(a)

trading by an insider while in possession of material non-public information;

5


 

(b)

trading by a non-insider while in possession of material non-public information, where the information either was disclosed to the non-insider in violation of an insider’s duty to keep it confidential or was misappropriated; or

 

 

 

 

(c)

communicating material non-public information to others.

          The elements of insider trading and the penalties for such unlawful conduct are discussed below.  If, after reviewing this policy statement, you have any questions you should consult the Chief Compliance Officer.

 

2.

Who is an Insider?

          The concept of who is an “insider” is broad.  It includes generally officers, directors and employees of a company.  In addition, a person can become a “temporary insider” if he or she enters into a special confidential relationship in the conduct of a company’s affairs and, as a result, is given access to information solely for the company’s purposes.  A temporary insider can include, among others, a company’s attorneys, accountants, consultants, bank lending officers, and certain employees of such organizations.  In addition, although it is unlikely to occur in the normal conduct of its business, the Company or a Covered Person could become a temporary insider of a company it advises or for which it performs other services.  According to the U.S. Supreme Court, the company must expect an outsider to keep the disclosed non-public information confidential and the relationship must at least imply such a duty before the outsider will be considered an insider.

 

3.

What is Material Information?

          Trading on inside information is not a basis for liability unless the information is material. “Material information” is defined generally as information for which there is a substantial likelihood that a reasonable investor would consider it important in making his or her investment decisions, or information that is reasonably certain to have a substantial effect on the price of a company’s securities.  Information that insiders should consider material includes, but is not limited to, dividend changes, earnings estimates, changes in previously released earnings estimates, significant merger or acquisition proposals or agreements, major litigation problems, antitrust charges, labor disputes, pending large commercial or government contracts, major new products or services, significant shifts in operating or financial circumstances (such as major write-offs and strikes at major plants) and extraordinary management developments (such as key personnel changes).

          Material information does not have to relate to a company’s business.  For example, in one case, the Supreme Court considered as material certain information about the contents of a forthcoming newspaper column that was expected to affect the market price of a security.  In that case, a Wall Street Journal reporter was found criminally liable for disclosing to others the dates that reports on various companies would appear in The Wall Street Journal and the favorableness of those reports.

6


 

4.

What is Non-public Information?

          Information is non-public until it has been effectively communicated to the market place.  One must be able to point to some fact to show that the information is generally public.  For example, information found in a report filed with the SEC, or appearing in Dow Jones , Reuters Economic Services , The Wall Street Journal or other publications of general circulation would be considered public.

 

5.

Penalties for Insider Trading

          Penalties for trading on or communicating material non-public information are severe, both for individuals involved in such unlawful conduct and their employers.  A person can be subject to some or all of the penalties below even if he or she does not personally benefit from the violation.  Penalties include:

 

•

civil injunctions;

 

 

 

 

•

disgorgement of profits;

 

 

 

 

•

jail sentences;

 

 

 

 

•

fines for the person who committed the violation of up to three times the profit gained or loss avoided, whether or not the person actually benefited; and

 

 

 

 

•

fines for the employer or other controlling person of up to the greater of $1,000,000 or three times the amount of the profit gained or loss avoided.

          In addition, any violation of this policy statement can be expected to result in serious sanctions by the Company, as detailed in Appendix G , potentially including dismissal of the persons involved.

 

B.

Procedures to Detect and Prevent Insider Trading; General Trading Practices

          The following procedures have been established to aid Covered Persons in avoiding insider trading, and to aid the Company in preventing, detecting and imposing sanctions against individuals for insider trading.  Each Covered Person must follow these procedures or risk serious sanctions, including dismissal, substantial personal liability and criminal penalties.

 

1.

Identifying Inside Information

          Before trading for yourself or others, including any Client Account, in the securities of a company about which you may have potential inside information, ask yourself the following questions:

 

(a)

Is the information material? Is this information that an investor would consider important in making his or her investment

7


 

 

decisions? Is this information that would substantially affect the market price of the securities if disclosed?

 

 

 

 

(b)

Is the information non-public? To whom has this information been provided? Has the information been effectively communicated to the marketplace by appearing in publications of general circulation? Is the information already available to a significant number of other traders in the market?

 

 

 

          If after consideration of the foregoing you believe that the information is material and non-public, or if you have questions as to whether the information is material and non-public, you should take the following steps:

 

 

 

 

(c)

Report the matter immediately to the Chief Compliance Officer.

 

 

 

 

(d)

Do not purchase or sell the securities on behalf of yourself or others, including any Client Account.

 

 

 

 

(e)

Do not communicate the information within or outside of the Company other than to the Chief Compliance Officer.


 

2.

Client Account Trading

          In connection with certain Company investments in equity or other securities, certain Covered Persons may gain access to material, non-public information relating to the issuer.  In such cases, the issuer will be placed on the Company’s watch list or restricted list, as appropriate, in accordance with Section IV.B.6 of the Code of Ethics.  In addition, in connection with investments in equity or other securities, the Company may enter into a confidentiality agreement relating to information that it may receive concerning issuers.  It is the Company’s general policy that all companies who are the subject of a confidentiality agreement relating to equity or other securities will be placed on the Company’s watch list.  In order to avoid the misuse, or the appearance of misuse, of any material, non-public information that a Covered Person or the Company may possess relating to any of its equity or other securities, all securities transactions for any Client Account must be pre-cleared by the Chief Compliance Officer.

 

3.

Personal Securities Trading

          Each Covered Person must obtain pre-clearance from the Chief Compliance Officer before engaging in any securities transaction 7 in which the Covered Person has or will acquire

7           Pre-clearance is required only in respect of “reportable securities.” A “reportable security” means a security as defined in Section 202(a)(18) of the Advisers Act, except that it does not include direct obligations of the United States Government, bankers’ acceptances, bank certificates of deposit, commercial paper, high quality short-term debt instruments, shares of open-end investment companies registered under the 1940 Act (other than “reportable funds” (as defined below)), or units of unit investment trusts that are invested exclusively in one or more investment companies registered under the 1940 Act (other than reportable funds). A “reportable fund” means any investment company registered under the 1940 Act for which the Company serves as investment adviser or any such investment company whose investment adviser or principal underwriter controls the Company, is controlled by the Company or is under common control with the Company (with control as defined in Section 2(a)(9) of the 1940 Act). “High quality short-term debt instruments” means any instrument that has a maturity at issuance of less than 366 days and that is rated in one of the two highest rating categories by a Nationally Recognized Statistical Rating Organization.

8


direct or indirect “beneficial ownership,” 8 the Covered Person’s family (including a spouse, minor children and individuals living in the same household as the Covered Person), or trusts of which the Covered Person is a trustee or in which he or she has a beneficial interest are parties.  Each such Covered Person must provide the Chief Compliance Officer with a written description of the proposed transaction in the form of Annex C to the Company’s Compliance Manual (or by the Company’s email notification procedures relating pre-clearance of trades), and the Chief Compliance Officer shall notify the person promptly of clearance or denial of clearance to trade.  Notification of approval or denial to trade may be verbally given, but the Chief Compliance Officer will acknowledge and date the written description of the proposed transaction to confirm his/her approval, a copy of which shall be kept in the Company’s records.

          The Chief Compliance Officer shall report all violations of this Section IV.B.3. to the Compliance Committee.

 

4.

Restricting Access to Material Non-public Information

          Information in your possession that you identify as material and non-public may not be communicated to anyone, including any person within the Company other than those persons who need to know such information in order to perform their job responsibilities at the Company.  In addition, care should be taken to keep the information secure.  For example, memos, reports, correspondence or files containing the information should be restricted.

 

5.

Resolving Insider Trading Issues

          If, after consideration of the provisions of this Code of Ethics, you have questions as to whether information is material or non-public, the propriety of any action, or about the foregoing procedures, please contact the Chief Compliance Officer to discuss your questions before trading or communicating the information to anyone.

 

6.

Watch Lists and Restricted Lists

          Whenever the Chief Compliance Officer determines that a Covered Person of the Company is in possession of material, non-public information with respect to a company

8           “Beneficial ownership” of a security is determined in the same manner as it would be for purposes of Section 16 of the Exchange Act, and Rule 16a-1 thereunder, except that such determination should apply to all securities. Generally, you should consider yourself the beneficial owner of securities held by your spouse, your minor children, a relative who shares your home, or other persons who, directly or indirectly, through any contract, understanding, arrangement, relationship or otherwise, has or shares a direct or indirect pecuniary interest in such securities. You should also consider yourself the beneficial owner of securities if you can vest or revest title in yourself, now or in the future. Any report by a Covered Person required under this Code of Ethics may contain a statement that the report will not be construed as an admission that the person making the report has any direct or indirect beneficial ownership in the security to which the report relates.

9


(regardless of whether the securities of such company are currently owned by the Company or any Client Account, but particularly if the Company is analyzing or recommending securities for Client transactions), such company will either be placed on a watch list or on a restricted list.  If the company is placed on a watch list, the flow of the information to other Covered Persons relating to such company will be restricted in order to allow certain Client Accounts or other Covered Persons to continue ordinary investment activities.  If the Chief Compliance Officer determines that material, non-public information relating to a company is in the possession of a Covered Person and cannot be adequately isolated through the use of the watch list, the company will be placed on the restricted list.  The Chief Compliance Officer will also have the discretion of placing a company on the restricted list even though no breach of the watch list has or is expected to occur with respect to material, non-public information about the company.  Such action may be taken for the purpose of avoiding any appearance of the misuse of material, non-public information.  When a company is placed on a watch list or restricted list, all Covered Persons (or certain designated Covered Persons with respect to the watch list) are prohibited from personal trading in securities of those companies.

          In the event that the Company (on behalf of a Client Account) or a Covered Person desires to engage in a securities transaction relating to an issuer that is listed on the Company’s watch list, the Chief Compliance Officer will conduct an investigation into the circumstances surrounding the placement of such issuer on the watch list.  In connection with any such investigation, the Chief Compliance Officer will determine (i) the extent to which any Covered Person may have continued possession of material, non-public information, and (ii) whether that Covered Person’s access (if any) to such material, non-public information will prevent the Client Account or Covered Person from engaging in such security transaction.  All such determinations will be made on a case-by-case basis.  Should the Chief Compliance Officer determine that the Client Account or Covered Person trade is permissible, then the portfolio manager or Covered Person, as appropriate, will be required to execute a certificate, a form of which is attached hereto as Appendix F , affirming that, as of such trade date, they do not possess any material, non-public information relating to such company.

          The Chief Compliance Officer will be responsible for determining whether to remove a particular company from the watch list or restricted list.  The only persons who will have access to the watch list or restricted list are members of the Compliance Committee and such persons who are affected by the information.  The watch list and restricted list are highly confidential and should not, under any circumstances, be discussed with or disseminated to anyone other than the persons noted above.

 

7.

Blackout Periods

          Blackout periods occur when Client securities trades are being placed or recommendations are being made, and all Covered Persons are restricted from engaging in personal securities transactions relating to such companies under consideration.  The Company will initiate and notify all Covered Persons of the existence of the blackout period.  Violations of this provision, even if unintentional, can result in the disgorgement of any profit (or deemed profit) resulting from the prohibited trading.

10


 

8.

Brokerage Restrictions

          The Company may require that Covered Persons trade only through certain brokers, or may place limitations on the number of brokerage accounts permitted.  The Company will initiate and notify Covered Persons of these requirements as they become necessary.

 

9.

Securities Assignment Procedures

          When allocating new securities analysis assignments to Company personnel, to the extent practicable, the Company will review the personnel files of its qualified Covered Persons to determine whether such Covered Person’s personal holdings present any apparent conflicts of interest.  Particular attention will be paid to personal transactions that were made within a six-month period of the security assignment research.  New securities analyses will not be assigned to Covered Persons whose personal holdings may present a conflict of interest.  A notation will be made in any such Covered Person’s file to document that they were considered for the opportunity, but could not be assigned the opportunity due to a potential conflict of interest.

V.

REQUIREMENTS REGARDING REGISTERED INVESTMENT ADVISERS

          Under Rule 204A-1 of the Advisers Act, the Company is required to establish, maintain and enforce policies and procedures that, among other things, require “Access Persons” 9 to periodically report their personal securities transactions and holdings to the Chief Compliance Officer.  The following requirements are designed to provide the Company with information to enable it to determine with reasonable assurance whether the provisions of Rule 204A-1 are being observed.

 

A.

Procedures

 

 

 

 

 

 

(1)

All Access Persons must submit to the Chief Compliance Officer a statement of all securities in which such Access Person has any direct or indirect “beneficial ownership” within 10 days of becoming an Access Person in the form of Appendix D hereto.  The information in the statement must be current as of a date no greater than 45 days prior to the person becoming an Access Person.

 

 

 

 

 

 

(2)

When an account is established by an Access Person in which any securities were held during a quarter for the direct or indirect benefit of the Access Person such Access Person is required to send written notification


9           As used in this Code of Ethics, an “Access Person” is (1) any partner, officer, director (or other person occupying a similar status or performing similar functions) or employee of the Company, or other person who provides investment advice on behalf of the Company and is subject to the supervision and control of the Company, (2) any director, officer, general partner or employee of any person in a control relationship to the Company who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding, Client investments, or whose functions relate to the making of any recommendations with respect to such investments and (3) any natural person in a control relationship to the Company who obtains information concerning recommendations made to a Client with regard to the purchase or sale of the Client’s investments.

11


 

 

 

(which include email notification) of such fact to the Chief Compliance Officer before engaging in any personal securities transactions through such account, but in any event within 30 days of the end of the calendar quarter in which the account was opened.  Such report must include (i) the name of the broker, dealer or bank with whom the Access Person established the account, (ii) the date the account was established and (iii) the date the report was submitted by the Access Person.  A letter in the form annexed hereto as Appendix B will be sent to the broker-dealer involved, allowing such Access Person to maintain the account and directing that duplicate confirmations of transactions in the account be sent to the Chief Compliance Officer.

 

 

 

 

 

 

(3)

Access Persons shall pre-clear all transactions in reportable securities .as provided in Section IV.B.3 of this Code of Ethics.  In addition, it is the Company’s policy that all Access Persons engaged in investment research activities for the Company must pre-clear with the portfolio manager in charge of the Company’s equity accounts any personal trade of a security of a company that operates in any business sector for which such Access Person has been assigned research and monitoring responsibilities.  This preclearance procedure is designed to provide the Company’s equity accounts the first opportunity to capitalize on investment opportunities that may be derived from the particularized knowledge that such Access Person may have relating to industries that such Access Person monitors for the Company.

 

 

 

 

 

 

(4)

In connection with any decision by the Chief Compliance Officer to approve transactions by investment personnel 10 acquiring direct or indirect beneficial ownership in any securities in an initial public offering ( i.e. , an offering of securities registered under the Securities Act, the issuer of which, immediately before registration, was not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act) or a limited offering ( i.e. , an offering exempt from registration under the Securities Act pursuant to Sections 4(2) or 4(6) or Rule 504, 505 or 506 thereunder), the Chief Compliance Officer will prepare a report of the decision that takes into account, among other factors, whether the investment opportunity should be reserved for a Client Account and whether the opportunity is being offered to an individual by virtue of his or her position with the Company or a Client.  Any investment personnel receiving approval from the Chief Compliance Officer to acquire securities in an initial public offering or a limited offering must disclose that investment when they participate in the Client’s subsequent


10          “Investment personnel” means any employee of the Company (or of any company in a control relationship to the Company) who, in connection with his or her regular functions or duties, makes or participates in making recommendations regarding Client investments, and any natural person who controls the Company and who obtains information concerning recommendations made to a Client regarding the Client’s investments.

12


 

 

 

consideration of an investment in such issuer and any decision on behalf of a Client Account to invest in such issuer will be subject to an independent review by investment personnel with no personal interest in the issuer.

 

 

 

 

 

 

(5)

Each Access Person is prohibited from intentionally engaging in personal transactions to buy or sell a security within at least four calendar days before and after a Client Account trades in that security.  The Access Person will be required to disgorge any profits realized on trades within the proscribed periods.

 

 

 

 

 

 

(6)

All Access Persons are prohibited from engaging in any personal securities transaction on a day that any Client Account has a pending “buy” or “sell” order involving the same security until the Client Account’s order is executed or withdrawn.

 

 

 

 

 

 

(7)

Execution of personal account orders of Access Persons are subject to completion of Client orders, and the Company reserves the right to cancel any such personal account orders or transactions.  If a personal account transaction is canceled, the Access Person bears the risk of loss and the Company (or a designated charity) will retain any profit associated with such cancellation.

 

 

 

 

 

 

(8)

All investment personnel are prohibited from receiving a gift or other personal items of more than de minimis value from any person or entity that does business with or on behalf of a Client.

 

 

 

 

 

 

(9)

Investment personnel must receive authorization from the Chief Compliance Officer prior to serving as a board member of any publicly-traded company.  Authorization will be based upon a determination that the board service would be consistent with the Client’s interests.  Any investment personnel serving as a board member of a publicly-traded company will be excluded from any investment decisions on behalf of a Client Account regarding such company.

 

 

 

 

 

 

(10)

Investment personnel must not take appropriate investment opportunities away from Clients.  Investment personnel must keep written documentation regarding their investments that might otherwise be considered appropriate for Clients but were not acted on with respect to such Clients.

 

 

 

 

 

 

(11)

Each Access Person shall submit reports in the form attached hereto as Appendix C to the Chief Compliance Officer, showing all transactions in reportable securities in which the Access Person has, or by reason of such transaction acquires, any direct or indirect “beneficial ownership.” These reports shall be filed no later than 30 days after the end of each calendar quarter, but need not show transactions held in accounts over which such

13


 

 

 

person had no direct or indirect influence or control or transaction pursuant to an automatic investment plan. 11 An Access Person need not make a quarterly transaction report under this Section if the report would duplicate information contained in broker trade confirmations or account statements received by the Chief Compliance Officer with respect to the Access Person in the time period required above and retained in the Company’s records, if all information required to be in the quarterly transaction report is contained in the broker trade confirmations or account statements.  In such instances, the Access Person will sign a certificate stating that the broker trade confirmations and account statements report all trades made by such Access Person in any securities or commodities account during the stated period (other than those excepted by the provisions of this Code of Ethics).

 

 

 

 

 

 

(12)

Each Access Person shall submit annual reports in the forms attached hereto as Appendix D to the Chief Compliance Officer no later than February 14 each year, current as of a date no more than 45 days before each report is submitted.

 

 

 

 

 

 

(13)

All Access Persons are required to certify annually to the Chief Compliance Officer that they have (i) read and understand the foregoing procedures and recognize that they are subject to the terms and conditions hereof, (ii) complied with the requirements of the foregoing procedures and (iii) disclosed or reported all personal securities transactions required to be disclosed or reported pursuant to the foregoing procedures.  A form of certification is annexed hereto as Appendix E .

          A chart listing all of the various reports and their respective filers and deadlines is attached hereto as Appendix I .

 

B.

Chief Compliance Officer

 

 

 

 

 

The Chief Compliance Officer shall:

 

 

 

 

 

 

(1)

review all reports required to be made Access Persons pursuant to this Code of Ethics;

 

 

 

 

 

 

(2)

submit to the Compliance Committee each calendar quarter a written report listing (i) the names of those persons who were required to submit reports for the prior quarter under this Code of Ethics but failed to and (ii) any reported securities transaction that occurred during the prior quarter


11          Automatic investment plan means a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation. An automatic investment plan includes a dividend reinvestment plan.

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that may have been inconsistent with the provisions of this Code of Ethics; and

 

 

 

 

 

 

(3)

promptly investigate any securities transaction listed pursuant to subparagraph (b)(ii) above and submit periodic status reports with respect to each such investigation to the Compliance Committee.

 

 

 

 

 

C.

Reports

          At least once a year, the Chief Compliance Officer shall provide the Compliance Committee with a written report (i) describing issues that arose during the previous year under this Code of Ethics, including information about material Code of Ethics violations and sanctions imposed in response to these material violations, and (ii) certifying that the Company has adopted procedures reasonably necessary to prevent Access Persons from violating the Code of Ethics.  Copies of these reports must be preserved with the Company’s records for the period required by Rule 204A-1 of the Advisers Act.

 

D.

Records

          Pursuant to Rule 204-2 under the Advisers Act, a copy of the Company’s Code of Ethics, a record of any violations of the Code of Ethics and of any action take as a result of such violation, and a copy of each report by a current or past Access Person, are maintained by the Company for a period of five years subsequent to each event, the first two years in an easily accessible place.

Adopted:          January 10, 2006

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APPENDIX A

Acknowledgment

PROSPECT MANAGEMENT ADVISERS, L.P.

SIGNATURE PAGE FOR
CODE OF ETHICS AND POLICY AND PROCEDURES DESIGNED TO DETECT AND
PREVENT INSIDER TRADING AND TO COMPLY WITH RULE 204A-1 OF THE
INVESTMENT ADVISERS ACT OF 1940, AS AMENDED (THE “CODE OF ETHICS”)

          I certify that I have read and understand the policy and procedures presented herein and recognize that I am subject to its terms and conditions.  I have disclosed all reported personal securities transactions required to be disclosed or reported pursuant to the Code of Ethics procedures and will continue to do so.

 

 

 

 

 

 

 

Print Name:

 

Date

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APPENDIX B

Date:  ___________________

Contact:
Broker/Dealer:
Telephone:
Address:

Re:          _________________________________________   (Access Person’s Name)

Dear        _________________________________________   :

We have been informed that __________, [state title] of Prospect Management Advisers, L.P. (“PMA”), who is involved with PMA’s investment activities, or the investment activities of funds advised by PMA, is maintaining an account with ____________________.

Account numbers:

 

This letter will serve to inform you that we do not object to the maintenance of this account, provided that you promptly send duplicate copies of all confirmations and statements to the undersigned marked “Personal and Confidential.”

Sincerely yours,

Scott Johnson
Chief Compliance Officer
Prospect Management Advisers, L.P.

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PFPC DISTRIBUTORS, INC.
CODE OF CONDUCT
April 20, 2001

This Code of Conduct has been adopted by the Firm’s Board of Directors for the purpose of avoiding and preventing certain actions constituting conflicts of interest with the investment activities of a Fund or Funds for which the Firm acts as distributor.  This Code of Conduct applies to all officers, directors, employees or associated persons of the Firm.  The terms and conditions of this Code shall supersede those of the PFPC Worldwide, Inc. Code of Conduct (the “PFPC Code”) to the extent that any term or condition of this Code is inconsistent with the PFPC Code. 

I.         Definitions

          The following definitions shall apply herein:

          1.          “Access Person” shall mean any Firm director or officer who, in the ordinary course of business, makes, participates in or obtains information regarding the purchase or sale of Covered Securities by a Fund for which the Firm acts as distributor, or whose functions or duties as part of the ordinary course of his or her business relate to the making of any recommendation to such Fund regarding the purchase or sale of Covered Securities.  An individual shall be considered as Access Person only with respect to the Fund to which the foregoing definition applies.  A list of the current Access Persons is attached to this Code as Appendix A.

          2.           “Beneficial Ownership” shall be interpreted in the same manner as it would be in determining whether a person is subject to the provisions of Section 16 of the Securities Exchange Act of 1934 and the rules and regulations thereunder. Application of this definition is explained in more detail in Appendix B hereto.

          3.           “Code” shall mean this Code of Conduct.

          4.          “Covered Security” (in the plural, “Covered Securities”) shall mean any security or securities referred to in Section 2(a)(36) of the Investment Company Act of 1940 (the “1940 Act”) (including any option, contract, warrant or exercisable right to purchase or sell any security) with the following exceptions: direct obligations issued or guaranteed by the United States; short-term securities issued or guaranteed by an agency or instrumentality of the United States; commercial paper; bankers’ acceptances; bank certificates of deposit; commercial paper and high quality short-term debt instruments, including repurchase agreements; shares of open-end registered investment companies; and any other securities excepted by Rule 17j-1 under the 1940 Act.

          5.           “Firm” shall mean PFPC Distributors, Inc.

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          6.           “Designated Person” shall mean any person designated by the Firm to be authorized to take actions to carry out policies and procedures set forth in the Code.  As of the date of this Code, the President and Chief Compliance Officer for the Firm has been named the Designated Persons.

          7.           “Employee” (in the plural, “Employees”) shall mean each person registered as a representative of the Firm with the National Association of Securities Dealers, Inc.

          8.           “Fund” (in the plural, “Funds”) shall mean any registered investment company or investment portfolio for which the Firm acts as distributor.

          9.           “Material Information” shall mean information (i) which can reasonably be expected to have a material impact on the financial condition or operations of a Firm or (ii) which an investor would consider important in determining whether to buy or sell securities of an issuer.

          10.          “Personal Account” shall mean any account used for the purchase and sale of securities in which an Employee has a direct or indirect Beneficial Ownership.

          11.          “Purchase or Sale of a Covered Security” includes, among other things, the writing of an option to purchase or sell a Covered Security.

          12.          “Security Held or to be Acquired by the Fund” shall mean any Covered Security, which, within the most recent 15 days:  (a) is being held by the Fund; or (b) is being or has been considered by the Fund or its investment adviser for purchase by the Fund, and any option to purchase or sell, and any security convertible into or exchangeable for, a Covered Security.

II.       Reporting Requirements

           A.  Initial Holdings Reports

          No later than 10 days after a person becomes an Access Person, every Access Person must file with the Chief Compliance Officer an initial holdings report which shall set forth the following information:

          (a)          the title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect beneficial ownership when the person became an Access Person;

          (b)          the name of any broker, dealer or bank with whom the Access Person maintained an account in which any securities were held for the direct or indirect benefit of the Access Person as of the date the person became an Access Person; and

          (c)          the date that the report is submitted by the Access Person.

2


          A sample of the form of report is attached to this Code as Appendix C.

           B.  Quarterly Transaction Reports

          Every Access Person must file with the Chief Compliance Officer not later than 10 days after the end of each calendar quarter a confidential personal securities transaction report for such quarter setting forth for every transaction in a Covered Security in the Access Person’s Personal Account the following information:

          (a)          the date of the transaction, the title, the interest rate and maturity date (if applicable), the number of shares and the principal amount of each Covered Security involved;

          (b)          the nature of the transaction (i.e., purchase, sale, or any other type of acquisition or disposition including gifts, exercise of conversion rights, exercise or sale of subscription rights, reinvestment of dividends and receipt of stock splits or stock dividends);

          (c)          the price at which the transaction was effected;

          (d)          the name of the broker, dealer, bank, other corporation, or person with or through whom the transaction was effected; and

          (e)          the date the report is submitted by the Access Person.

          A sample of the form of report is attached to this Code as Appendix D.

          An Access Person need not make a quarterly transaction report if the report would duplicate information contained in the broker trade confirmations or account statements received by the Firm with respect to the Access Person, if all of the information required is contained in the broker trade confirmations or accounts statements or the records of the Firm.

           C.  Annual Holdings Reports

Annually every Access Person must file with the Chief Compliance Officer a confidential personal securities transaction report (which must be current as of a date no more than 30 days before the report is submitted) setting forth for every transaction in a Covered Security in the Access Person’s Personal Account the following information:

          (a)           the title, number of shares and principal amount of each Covered Security in which the Access person had an direct or indirect beneficial ownership;

3


          (b)          the name of any broker, dealer or bank with whom the Access Person maintains an account in which any securities are held for the direct or indirect benefit of the Access Person; and

          (c)          the date the report is submitted by the Access Person.

          A sample of the form of report is attached to this Code as Appendix E.

           D.  Statement Regarding Beneficial Ownership

          Any such report may contain a statement to the effect that such report shall not be construed as an admission by the reporting person as to any direct or indirect beneficial ownership of the Security or Securities to which the report relates.

           E.  Exception to Reporting Requirements

          No Access Person shall be required to make the foregoing report where the Firm (i) is not an affiliated person of any Fund or any investment adviser of any Fund and (ii) has no officers, directors or general partners who serve as officers, directors or general partners of such Fund or any such investment adviser.  As of the date of this Code, the foregoing exception to reporting applies to all Access Persons.  The Designated Supervisory Person shall notify all Access Persons immediately in the event that the exception to the reporting requirement is no longer applicable.

III.      Restrictions on Personal Securities Transactions by Employees

           A.  Unlawful Actions

          It is unlawful for any Employee, Firm director or Firm officer, in connection with the purchase or sale, directly or indirectly, by the person of a Security Held or to be Acquired by the Fund:

          (a)          to employ any device scheme or artifice to defraud the Fund;

          (b)          to make any untrue statement of a material fact to the Fund or to omit to state a material fact necessary in order to make the statements made to the Fund, in light of the circumstances in which they are made, not misleading;

          (c)          to engage in any act, practice or course of business that operates or would operate as a fraud or deceit on the Fund; or

          (d)          to engage in any manipulative practice with respect to the Fund.

           B.  Trading Restrictions During Certain Periods

4


          No Employee, Firm director or Firm officer may, directly or indirectly, purchase or sell a Covered Security for his or her Personal Account if such individual knows or, in the ordinary course of fulfilling his or her duties as an Employee, Firm director or Firm officer, should know that (i) a purchase or sale of such Covered Security by a Fund is being considered by the Fund or its investment adviser, or (ii) during the five (5) business day period immediately preceding the date of the transaction in a Covered Security by the Employee, Firm director or Firm officer, such Security was purchased or sold by a Fund.

           C. Trading Restrictions While in Possession of Non-Public Material Information

          No Employee, Firm director or Firm officer may, directly or indirectly, purchase or sell a Covered Security for his or her Personal Account while such individual possesses non-public Material Information relating to that Covered Security or its issuer.  The most common examples of information that is “non-public” are:  (i) information that has neither been published by any news agency nor filed with the Securities and Exchange Commission as part of a publicly available filing and (ii) information that has been discussed only within the confines of a board meeting.

           D.  Violations

          Any Employee, Firm officer or Firm director who has violated Sections III (A), (B) or (C) of the Code or who knows of such a violation by another Employee, Firm director or Firm officer shall immediately notify the Designated Person, in writing, of such violation.

           E.  General

          Apart from the specific restrictions set forth in Sections II and III of the Code, purchases and sales should be arranged in such a way as to avoid transactions contrary to the intent of this Code. Any attempt by an Employee, Firm director or Firm officer to do indirectly what this Code is meant to prohibit will be deemed a direct violation hereof. If there is any doubt whether your transactions may be in conflict with the intent of this Code you should check before buying or selling with the Designated Person.

           F.  Registered Investment Adviser Employees

          Certain associated persons of the Firm may also be employees of a registered investment adviser and, accordingly, subject to codes of conduct, including restrictions on personal securities transactions, more stringent than those set forth in this Code.  The Firm will rely on the registered investment advisers to enforce their codes of conduct.

           G.  Sanctions

          If the Designated Person determines that a violation of the Code has occurred, she shall so advise the Firm’s Board of Directors for referral to the Executive Management Committee of PFPC Worldwide, Inc., the parent of the Firm (the “Committee”). The Committee may impose such sanctions as it deems appropriate, including, inter alia , a

5


letter of censure or suspension or termination of the employment of the violator. In any event, (i) any Employee, Firm director or Firm officer who violates Section III (A) or (B) of the Code shall be subject to disciplinary action which may include termination of registration with the Firm and (ii) any profit realized from a securities transaction that violates Section III (A) or (B) of the Code shall be disgorged as directed by the Committee.

IV.      Annual Certification

          On an annual basis, each Employee, Firm director and Firm officer shall certify in writing that such individual has read and understands the Code and has complied with all of its provisions during the preceding year in which the Code was in effect.  The annual certification is attached to the Code. (Upon employment, each employee will receive the Code and sign an initial “Certification of Receipt.”)

V.        Miscellaneous

           A.  Administration of the Code

          1.          The Firm shall use reasonable diligence and institute procedures reasonably necessary to prevent violations of this Code.

          2.          No less frequently than annually, the Firm shall furnish to the Fund’s board of directors a written report that

                       (a)          describes any issues arising under the Code since the last report to the board of directors, including, but not limited to, information about material violations of the Code and sanctions imposed in response to material violations; and

                       (b)          certifies that the Firm has adopted procedures reasonably necessary to prevent Access Persons from violating the Code.

           B.  Records

          1.          The Firm shall maintain records in the manner and to the extent set forth below, which records may be maintained in any manner described in Rule 31a-2(f)(1) under the 1940 Act, as follows:

                       (a)           a copy of the Code and any other code which is, or at any time within the past five years has been in effect, shall be preserved in an easily accessible place;

                       (b)           a record of any violation of the Code, and of any action taken as a result of such violation, shall be preserved in an easily accessible place for a period of not less than five years following the end of the fiscal year in which the violation occurs;

6


                       (c)           a copy of each certification made by an Employee, Firm director or Firm officer pursuant to the Code (including any information provided in lieu of reports under Section II(B) of the Code) shall be preserved for a period of not less than five years from the end of the fiscal year in which it is made, for the first two years in an easily accessible place;

                       (d)          a record of all persons, currently or within the last five years, who are or were required to make reports under Section II of the Code, or who are or were responsible for reviewing these reports, shall be preserved in an easily accessible place; and

                        (e)          a copy of each report required by Section V(A)(2) shall be maintained for at least five years after the end of the fiscal year in which it is made, the first two years in an easily accessible place.

          2.           The Firm shall make such records available for examination at the Firm headquarters by representatives of the Securities and Exchange Commission at such time as said representatives may reasonably request.

          3.           Except as may be required pursuant to Section III (E) and Section V (A)(2) of the Code, all reports and any other information of a personal nature shall be treated as confidential by the Designated Supervisory Person.

           C.  Interpretation of Code

          The Designated Person in consultation with the Firm’s Chief Legal Officer shall determine how the provisions of the Code shall be interpreted, and may from time to time establish administrative procedures to assist in carrying out the intent of the Code.

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APPENDIX A

LIST OF ACCESS PERSONS

NAME

 

TITLE

 

ACCESS PERSON?

 

 

Brian Burns

 

Director, President, Chief Executive Officer & Chairman

 

No*

Michael DeNofrio

 

Director

 

No*

Nicholas Marsini

 

Director

 

No*

Rita Adler

 

Chief Compliance Officer, Anti-Money Laundering Officer

 

No*

Christine Ritch

 

Chief Legal Officer, Assistant Secretary & Assistant Clerk

 

No*

Craig Stokarski

 

Treasurer and Financial and Operations Principal

 

No*

Bradley Stearns

 

Assistant Secretary & Assistant Clerk

 

No*

Doug Castagna

 

Controller & Assistant Treasurer

 

No*

Julie Bartos

 

Assistant Secretary & Assistant Clerk

 

No*

Amy Brennan

 

Assistant Secretary & Assistant Clerk

 

No*


*Not an Access Person because (1) such person does not in the ordinary course of his/her business make, participate in or obtain information regarding the purchase or sale of securities for a Fund; and (2) such person’s duties as part of the ordinary course of his/her business do not relate to the making of any recommendation to such Fund regarding the purchase or sale of securities.

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APPENDIX B

This Code of Conduct relates to the purchase or sale of securities of which a person has a direct or indirect “beneficial ownership” except for purchases or sales in accounts over which the person has no direct or indirect influence or control as described below.

Beneficial Ownership

“Beneficial ownership” means that one directly or indirectly, by written or unwritten understanding, has a (or shares a direct or indirect) financial interest regardless of who is the owner of record. Financial interest means the opportunity, directly or indirectly, to participate in the risks and rewards of a transaction. Securities owned by a person or by a trust of which one has a beneficial ownership or a similar arrangement include, but are not limited to:

(1) Securities owned by your spouse, your minor children and relatives of you and your spouse who live in your home, including trusts of which such persons are beneficiaries (other than interests in a trust over which neither you nor such person has any direct or indirect influence or control over investments);

(2) A proportionate interest in securities held by a partnership of which you are a general partner;

(3) Securities in which you have a right to dividends that is separated or separable from the underlying securities; 

(4) Securities that you have a right to acquire through the exercise or conversion of another security, whether or not presently exercisable; and

(5) Securities held in accounts from which you receive a performance related fee based on less than one year’s performance.

You do not have a financial interest in securities held by a corporation of which you are not a controlling shareholder and do not have or share investment control over its portfolio.

No Influence or Control

The Code does not apply to purchases and sales of securities effected in any account over which you do not have “any direct or indirect influence or control”. However, this “no direct or indirect influence or control” exception is limited to few situations. The principal one is that described in paragraph (1) above, where securities are held in a trust, in which you have a beneficial interest, but where you are not the Trustee and have no control or influence over the Trustee.

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