AdvisorShares Investments, LLC and AdvisorShares Trust; Notice of Application, 80454-80457 [E8-31086]

Download as PDF 80454 Federal Register / Vol. 73, No. 251 / Wednesday, December 31, 2008 / Notices expertise in providing Fund Service Activities. Applicants further state that prohibiting them from providing advisory and distribution services would not only adversely affect their businesses, but would also adversely affect over 450 employees that are involved in those activities. Applicants also state that disqualifying UBS AG and ESC GP from continuing to provide investment advisory services to ESCs is not in the public interest or in furtherance of the protection of investors. Because the ESCs have been formed for the benefit of key employees, officers, directors and current consultants of UBS AG and its affiliates, it would not be consistent with the purposes of the ESC provisions of the Act to require another entity not affiliated with UBS AG to manage the ESCs. In addition, participants in the ESCs have subscribed for interests in the ESCs with the expectation that the ESCs would be managed by an affiliate of UBS AG. 7. Applicants state that UBS Securities and certain other Applicants have previously received an order under section 9(c) of the Act.4 Applicants also state that affiliated persons of UBS Securities previously have received exemptions under section 9(c) as the result of conduct that triggered section 9(a), as described in greater detail in the application. Applicants’ Condition Applicants agree that any order granting the requested relief will be subject to the following condition: Any temporary exemption granted pursuant to the application shall be without prejudice to, and shall not limit the Commission’s rights in any manner with respect to, any Commission investigation of, or administrative proceedings involving or against, Covered Persons, including without limitation, the consideration by the Commission of a permanent exemption from section 9(a) of the Act requested pursuant to the application or the revocation or removal of any temporary exemptions granted under the Act in connection with the application. pwalker on PROD1PC71 with NOTICES Temporary Order The Commission has considered the matter and finds that the Applicants have made the necessary showing to justify granting a temporary exemption. Accordingly, It is hereby ordered, pursuant to section 9(c) of the Act, that Applicants 4 UBS Securities L.L.C., et al., Investment Company Act Rel. Nos. 26245 (Oct. 31, 2003) (notice) and 27047 (Apr. 25, 2005) (order). VerDate Aug<31>2005 17:41 Dec 30, 2008 Jkt 217001 and any other Covered Persons are granted a temporary exemption from the provisions of section 9(a), solely with respect to the Injunction, subject to the condition in the application, from December 23, 2008, until the Commission takes final action on their application for a permanent order. By the Commission. Florence E. Harmon, Acting Secretary. [FR Doc. E8–31087 Filed 12–30–08; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Investment Company Act Release No. 28568; 812–13488] AdvisorShares Investments, LLC and AdvisorShares Trust; Notice of Application December 23, 2008. AGENCY: Securities and Exchange Commission (‘‘Commission’’). ACTION: Notice of an application for an order under section 6(c) of the Investment Company Act of 1940 (‘‘Act’’) for an exemption from sections 2(a)(32), 5(a)(1) and 22(d) of the Act and rule 22c–1 under the Act, and under sections 6(c) and 17(b) of the Act for an exemption from sections 17(a)(1) and (a)(2) of the Act. Applicants: AdvisorShares Investments, LLC (the ‘‘Advisor’’) and AdvisorShares Trust (the ‘‘Trust’’). Summary of Application: Applicants request an order that permits: (a) Series of certain open-end management investment companies to issue shares (‘‘Shares’’) redeemable in large aggregations only (‘‘Creation Units’’); (b) secondary market transactions in Shares to occur at negotiated market prices; and (c) certain affiliated persons of the series to deposit securities into, and receive securities from, the series in connection with the purchase and redemption of Creation Units. Filing Dates: The application was filed on January 31, 2008, and amended on October 17, 2008. Applicants have agreed to file an amendment during the notice period, the substance of which is reflected in this notice. Hearing or Notification of Hearing: An order granting the requested relief will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Commission’s Secretary and serving applicants with a copy of the request, personally or by mail. Hearing requests should be received by the Commission PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 by 5:30 p.m. on January 15, 2009, and should be accompanied by proof of service on applicants, in the form of an affidavit or, for lawyers, a certificate of service. Hearing requests should state the nature of the writer’s interest, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the Commission’s Secretary. ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549– 1090. Applicants: Noah Hamman, c/o Morgan, Lewis & Bockius LLP, 1111 Pennsylvania Avenue, NW., Washington, DC 20004. FOR FURTHER INFORMATION CONTACT: Courtney S. Thornton, Senior Counsel, or Michael W. Mundt, Assistant Director, at (202) 551–6821 (Division of Investment Management, Office of Investment Company Regulation). SUPPLEMENTARY INFORMATION: The following is a summary of the application. The complete application may be obtained for a fee at the Commission’s Public Reference Desk, 100 F Street, NE., Washington, DC 20549–1520 (tel. 202–551–5850). Applicants’ Representations 1. The Trust, a statutory trust established under the laws of Delaware, is registered with the Commission as an open-end management investment company. The Trust is organized as a series investment company with one initial series (the ‘‘Initial Fund’’). The investment objective of the Initial Fund will be to provide long term growth of capital. The Initial Fund and all future series of the Trust (‘‘Future Funds,’’ collectively with the Initial Fund, ‘‘Funds’’) will attempt to achieve their investment objectives by utilizing active management strategies based on various formulas for asset allocation, security selection, and portfolio construction. Each Fund will primarily hold shares of underlying exchange traded funds (‘‘ETFs’’), as well as shares of certain exchange traded products that are not registered as investment companies under the Act.1 Applicants will only 1 The Funds may invest in exchange traded products that invest primarily in commodities or currency, but otherwise operate in a manner similar to exchange traded products registered under the Act. In addition, the Funds may also invest in equity securities or fixed income securities traded in a U.S. or non-U.S. markets, as well as futures contracts, options on such futures contracts, swaps, forward contracts or other derivatives, and shares of money market mutual funds or other investment companies, all in accordance with their investment objectives. The Funds may also invest in equity securities or fixed income securities traded in international markets or in a combination of equity, E:\FR\FM\31DEN1.SGM 31DEN1 pwalker on PROD1PC71 with NOTICES Federal Register / Vol. 73, No. 251 / Wednesday, December 31, 2008 / Notices invest in unaffiliated ETFs that have received certain exemptive relief from the Commission to permit such investments in excess of the limits of section 12(d)(1)(A) and (B) of the Act. Any Future Fund (a) will be advised by the Advisor or an entity controlled by or under common control with the Advisor, and (b) will comply with the terms and conditions of the order. 2. The Advisor, a Delaware limited liability company, or a subsidiary of such company, will serve as the investment adviser to each Fund. The Advisor will be registered as an investment adviser of the Investment Advisers Act of 1940 (‘‘Advisers Act’’) prior to a Fund beginning operations. Applicants anticipate that Funds also may engage subadvisors (‘‘Subadvisors’’). 3. Applicants anticipate that shares (‘‘Shares’’) of the Funds will be sold at a price of between $25 and $200 per Share in Creation Units of 25,000 or more Shares. All orders to purchase Creation Units must be placed with the principal underwriter and distributor of the Creation Units (‘‘Distributor’’) by or through a party that has entered into a participant agreement with the Distributor (‘‘Authorized Participant’’). Authorized Participants will include broker-dealers, banks, trust companies, and clearing companies that are participants in the Depository Trust Company (‘‘DTC,’’ and such participants, ‘‘DTC Participants’’). Purchases of Creation Units of the Funds will be made generally by means of an in-kind tender of shares of specific ETFs (the ‘‘Deposit Securities’’), with any cash portion of the purchase price (the ‘‘Cash Amount’’) to be kept to a minimum. The Cash Amount is an amount equal to the difference between the NAV of a Creation Unit and the market value of the Deposit Securities. The Trust reserves the right to permit, under certain circumstances, a purchaser of Creation Units to substitute cash in lieu of depositing some or all of the requisite Deposit Securities. The Trust may in the future determine that Shares of one or more Funds may be purchased in Creation Units on a cashonly basis if the Trust and the Advisor believe such method would substantially minimize the Trust’s transactional costs or enhance its operational efficiencies. 4. Each Fund will charge a fee (‘‘Transaction Fee’’) in connection with the sale or redemption of Creation Units to protect existing shareholders from the dilutive costs associated with the fixed income and U.S. money market securities and/or non-U.S. money market securities. VerDate Aug<31>2005 17:41 Dec 30, 2008 Jkt 217001 purchase and redemption of Creation Units. Each purchaser of a Creation Unit will receive a prospectus (‘‘Prospectus’’) that contains complete disclosure about the Transaction Fee. All orders to purchase Creation Units must be placed with the Distributor no later than the closing time of the regular trading session on the NYSE (ordinarily 4 p.m. ET) in order for the purchaser to receive the NAV determined on that date. The Distributor will transmit all purchase orders to the relevant Fund and will also maintain a record of Creation Unit purchases, send out confirmations of such purchases, and furnish a Prospectus to purchasers of Creation Units. 5. The Trust intends to list the Shares of each Fund on a national securities exchange (‘‘Listing Market’’) such as the NYSE. It is expected that one or more member firms will be designated to act as a specialist and maintain a market for the Shares trading on the Listing Market (‘‘Exchange Specialist’’). The price of Shares trading on the Listing Market will be based on a current bid/offer market. No secondary sales will be made to brokers or dealers at a concession by the Distributor or by a Fund. Purchases and sales of Shares in the secondary market, which will not involve a Fund, will be subject to customary brokerage commissions and charges. 6. Purchasers of Shares in Creation Units may hold such Shares or may sell them into the secondary market. Applicants expect that purchasers of Creation Units will include institutional investors and arbitrageurs, who will purchase or redeem Creation Units of a Fund in pursuit of arbitrage profit and thereby enhance the liquidity of the secondary market and keep the market price of shares close to their NAV. Applicants expect that secondary market purchasers of Shares will include both institutional investors and retail investors for whom Shares will provide a useful, retail-priced, exchange-traded mechanism for investing in a professionally managed, diversified selection of ETFs.2 7. Shares will not be individually redeemable, and owners of Shares may acquire those Shares from a Fund, or tender such Shares for redemption to the Fund, in Creation Units only. To redeem, an investor will have to accumulate enough Shares to constitute a Creation Unit. Redemption orders must be placed by or through an 2 Shares will be registered in book-entry form only. DTC or its nominee will be the registered owner of all outstanding Shares. DTC or DTC Participants will maintain records reflecting beneficial owners of Shares. PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 80455 Authorized Participant. A redeeming investor will receive a basket of securities designated to be delivered for Creation Unit redemptions on the date that the request for redemption is submitted (‘‘Redemption Securities’’), which in most cases will be the same as the Deposit Securities required to purchase Creation Units on that date, and will either receive from or pay to the Fund a balancing amount in cash. A Fund may make redemptions partly in cash in lieu of transferring one or more Redemption Securities to a redeeming investor if the Fund determines that such alternative is warranted, such as if the redeeming investor is unable, by law or policy, to own a particular Redemption Security. A redeeming investor also must pay a Transaction Fee to cover custodial costs. 8. The Trust will not be advertised or marketed or otherwise ‘‘held out’’ as a traditional open-end investment company or a mutual fund. The designation of the Trust and the Funds in all marketing materials will be limited to the terms ‘‘exchange-traded fund,’’ ‘‘investment company,’’ ‘‘fund’’ and ‘‘trust’’ without reference to an ‘‘open-end fund’’ or a ‘‘mutual fund,’’ except to compare and contrast the Trust and the Funds with traditional mutual funds. Each Fund’s Prospectus will also prominently disclose that the Fund is an actively managed exchange traded fund. All marketing materials that describe the method of obtaining, buying or selling Creation Units, or Shares traded on the Listing Market, or refer to redeemability, will prominently disclose that Shares are not individually redeemable and that the owners of Shares may acquire or redeem Shares from a Fund in Creation Units only. The same approach will be followed in the statement of additional information (‘‘SAI’’), shareholder reports and investor educational materials issued or circulated in connection with the Shares. The Trust will provide copies of its annual and semi-annual shareholder reports to DTC Participants for distribution to beneficial owners of Shares. 9. The Trust (or the Listing Market) intends to maintain a Web site that will be publicly available at no charge, which will include the Prospectus and other information about the Funds that is updated on a daily basis. On each Business Day, before the commencement of trading in Shares on the Listing Market, each Fund will disclose the identities and quantities of the securities (‘‘Portfolio Securities’’) and other assets held in the Fund portfolio that will form the basis for the E:\FR\FM\31DEN1.SGM 31DEN1 80456 Federal Register / Vol. 73, No. 251 / Wednesday, December 31, 2008 / Notices Fund’s calculation of NAV at the end of the Business Day.3 Applicants’ Legal Analysis 1. Applicants request an order under section 6(c) of the Act granting an exemption from sections 2(a)(32), 5(a)(1) and 22(d) of the Act and rule 22c–1 under the Act, and under sections 6(c) and 17(b) of the Act granting an exemption from sections 17(a)(1) and (a)(2) of the Act. 2. Section 6(c) of the Act provides that the Commission may exempt any person, security or transaction, or any class of persons, securities or transactions, from any provision of the Act, if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act. Section 17(b) of the Act authorizes the Commission to exempt a proposed transaction from section 17(a) of the Act if evidence establishes that the terms of the transaction, including the consideration to be paid or received, are reasonable and fair and do not involve overreaching on the part of any person concerned, and the proposed transaction is consistent with the policies of the registered investment company and the general provisions of the Act. pwalker on PROD1PC71 with NOTICES Sections 5(a)(1) and 2(a)(32) of the Act 3. Section 5(a)(1) of the Act defines an ‘‘open-end company’’ as a management investment company that is offering for sale or has outstanding any redeemable security of which it is the issuer. Section 2(a)(32) of the Act defines a redeemable security as any security, other than short-term paper, under the terms of which the holder, upon its presentation to the issuer, is entitled to receive approximately his proportionate share of the issuer’s current net assets, or the cash equivalent. Because Shares will not be individually redeemable, applicants request an order that would permit each Fund, as a series of an open-end management investment company, to issue Shares that are redeemable in Creation Units only. Applicants state that Creation Units will always be redeemable. Applicants further state that because Creation Units may always be purchased and redeemed 3 Applicants note that under accounting procedures followed by the Fund, trades made on the prior Business Day (‘‘T’’) will be booked and reflected in NAV on the current Business Day (‘‘T + 1’’). Accordingly, the Fund will be able to disclose at the beginning of the Business Day the portfolio that will form the basis for the NAV calculation at the end of the Business Day. VerDate Aug<31>2005 17:41 Dec 30, 2008 Jkt 217001 at NAV (less certain transactional expenses), the price of Creation Units on the secondary market and the price of the individual Shares of a Creation Unit, taken together, should not vary substantially from the NAV of Creation Units. a result of unjust or discriminatory manipulation. Finally, applicants contend that the proposed distribution system will be orderly because arbitrage activity will ensure that the difference between the market price of Shares and their NAV remains narrow. Section 22(d) of the Act and Rule 22c–1 under the Act 4. Section 22(d) of the Act, among other things, prohibits a dealer from selling a redeemable security, which is currently being offered to the public by or through a principal underwriter, except at a current public offering price described in the prospectus. Rule 22c– 1 under the Act generally requires that a dealer selling, redeeming, or repurchasing a redeemable security do so only at a price based on its NAV. Applicants state that trading in Shares will take place on and away from the Listing Market at all times on the basis of current bid/offer prices, not at a current offering price described in the prospectus, and not at a price based on NAV. Thus, purchases and sales of Shares in the secondary market will not comply with section 22(d) of the Act and rule 22c–1 under the Act. Applicants request an exemption under section 6(c) from these provisions. 5. Applicants assert that the concerns sought to be addressed by section 22(d) of the Act and rule 22c–1 under the Act with respect to pricing are equally satisfied by the proposed method of pricing Shares. Applicants maintain that while there is little legislative history regarding section 22(d), its provisions, as well as those of rule 22c–1, appear to have been designed to (a) prevent dilution caused by certain risklesstrading schemes by principal underwriters and contract dealers, (b) prevent unjust discrimination or preferential treatment among buyers, and (c) assure an orderly distribution of investment company shares by contract dealers by eliminating price competition from non-contract dealers who could offer investors shares at less than the published sales price and who could pay investors a little more than the published redemption price. 6. Applicants believe that none of these purposes will be relevant issues for secondary trading by dealers in Shares of a Fund. Applicants state that (a) secondary market trading in Shares will not cause dilution for owners of such Shares because such transactions do not directly involve Fund assets, and (b) to the extent different prices exist during a given trading day, or from day to day, such variances occur as a result of third-party market forces, such as supply and demand, but do not occur as Sections 17(a)(1) and 17(a)(2) of the Act 7. Section 17(a)(1) and (2) of the Act generally prohibit an affiliated person of a registered investment company, or an affiliated person of such a person (‘‘second tier affiliate’’), from selling any security to or purchasing any security from the company. Section 2(a)(3) of the Act defines ‘‘affiliated person’’ to include any person directly or indirectly owning, controlling, or holding with power to vote 5 percent or more of the outstanding voting securities of the other person and any person directly or indirectly controlling, controlled by, or under common control with, the other person. Section 2(a)(9) of the Act provides that a control relationship will be presumed where one person owns more than 25 percent of another person’s voting securities. The Funds may be deemed to be controlled by the Advisor or an entity controlling, controlled by or under common control with the Adviser and hence affiliated persons of each other. In addition, the Funds may be deemed to be under common control with any other registered investment company (or series thereof) advised by the Advisor or an entity controlling, controlled by or under common control with the Advisor (an ‘‘Affiliated Fund’’). Applicants state that an investor could own 5 percent or more of a Fund or the Trust, or in excess of 25 percent of the outstanding Shares of a Fund or the Trust, making that investor an affiliated person of the Fund or the Trust under section 2(a)(3)(A) or 2(a)(3)(C) of the Act. For so long as such an investor was deemed to be an affiliated person, section 17(a)(1) could be read to prohibit that investor from depositing the Deposit Securities with a Fund in return for a Creation Unit. Similarly, section 17(a)(2) could be read to prohibit such an investor from entering into an in-kind redemption with a Fund. 8. Applicants request an exemption from section 17(a) under sections 6(c) and 17(b), to permit in-kind purchases and redemptions by persons that are affiliated persons or second tier affiliates of the Funds solely by virtue of one or more of the following: (1) Holding 5 percent or more, or more than 25 percent, of the outstanding Shares of the Trust or one or more Funds; (2) an affiliation with a person with an ownership interest described in (1); or PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 E:\FR\FM\31DEN1.SGM 31DEN1 Federal Register / Vol. 73, No. 251 / Wednesday, December 31, 2008 / Notices pwalker on PROD1PC71 with NOTICES (3) holding 5 percent or more, or more than 25 percent, of the shares of one or more Affiliated Funds. 9. Applicants contend that no useful purpose would be served by prohibiting the affiliated persons or second tier affiliates of a Fund as described above from purchasing or redeeming Creation Units through ‘‘in-kind’’ transactions. The purchase and redemption of Creation Units of each Fund is on the same terms for all investors, whether or not such investor is an affiliate. In each case, Creation Units are sold and redeemed by the Trust at their NAV. The Deposit Securities and Redemption Securities will be valued in the same manner as the securities in the Fund portfolio. Accordingly, applicants believe the proposed transactions described above meet the section 17(b) standards for relief because the terms of such proposed transactions are reasonable and fair and do not involve overreaching on the part of any person concerned, and the proposed transactions will be consistent with the policies of each Fund and with the general purposes of the Act. Applicants’ Conditions The applicants agree that any order of the Commission granting the requested relief will be subject to the following conditions: 1. Neither the Trust nor any Fund will be advertised or marketed as an openend investment company or mutual fund. Each Fund’s Prospectus will prominently disclose that the Fund is an actively managed exchange-traded fund. Each Prospectus will prominently disclose that the Shares are not individually redeemable shares and will disclose that the owners of the Shares may acquire those Shares from the Fund and tender those Shares for redemption to the Fund in Creation Units only. Any advertising material that describes the purchase or sale of Creation Units or refers to redeemability will prominently disclose that the Shares are not individually redeemable and that owners of the Shares may acquire those Shares from the Fund and tender those Shares for redemption to the Fund in Creation Units only. 2. Each Fund’s Prospectus will clearly disclose that, for purposes of the Act, Shares are issued by a registered investment company and that the acquisition of Shares by investment companies and companies relying on sections 3(c)(1) or 3(c)(7) of the Act is subject to the restrictions of section 12(d)(1) of the Act. 3. The Web site for the Funds, which will be publicly accessible at no charge, will contain the following information, VerDate Aug<31>2005 17:41 Dec 30, 2008 Jkt 217001 on a per Share basis, for each Fund: (a) The prior Business Day’s NAV and the reported closing price, and a calculation of the premium or discount of the closing price against such NAV; and (b) data in chart format displaying the frequency distribution of discounts and premiums of the daily closing price against the NAV, within appropriate ranges, for each of the four previous calendar quarters (or for the life of the Fund, if shorter). 4. The Prospectus and annual report for each Fund will also include: (a) The information listed in condition 3(b), (i) in the case of the Prospectus, for the most recently completed year (and the most recently completed quarter or quarters, as applicable) and (ii) in the case of the annual report, for the immediately preceding five years (or for the life of the Fund, if shorter), and (b) the cumulative total return and the average annual total return based on NAV and closing price, calculated on a per Share basis for one-, five- and tenyear periods (or life of the Fund, if shorter). 5. As long as the Funds operate in reliance on the requested order, the Shares of the Funds will be listed on a Listing Market. 6. On each Business Day, before commencement of trading in Shares on a Fund’s Listing Market, the Fund will disclose on its Web site the identities and weightings of the component securities and other assets held by the Fund that will form the basis for the Fund’s calculation of NAV at the end of the Business Day. 7. The Advisor or any Subadvisor, directly or indirectly, will not cause any Authorized Participant (or any investor on whose behalf an Authorized Participant may transact with the Fund) to acquire any Deposit Security for the Fund through a transaction in which the Fund could not engage directly. 8. The requested order will expire on the effective date of any Commission rule under the Act that provides relief permitting the operation of actively managed exchange-traded funds. For the Commission, by the Division of Investment Management, under delegated authority. Florence E. Harmon, Acting Secretary. [FR Doc. E8–31086 Filed 12–30–08; 8:45 am] BILLING CODE 8011–01–P PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 80457 SECURITIES AND EXCHANGE COMMISSION [Investment Company Act Release No. 28571; 812–13440] Grail Advisors, LLC and Grail Advisors’ Alpha ETF Trust; Notice of Application December 23, 2008. AGENCY: Securities and Exchange Commission (‘‘Commission’’). ACTION: Notice of an application for an order under section 6(c) of the Investment Company Act of 1940 (‘‘Act’’) for an exemption from sections 2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act and rule 22c–1 under the Act, and under sections 6(c) and 17(b) of the Act for an exemption from sections 17(a)(1) and (a)(2) of the Act, and under section 12(d)(1)(J) for an exemption from sections 12(d)(1)(A) and (B) of the Act. Grail Advisors, LLC (‘‘Adviser’’) and Grail Advisors’ Alpha ETF Trust (‘‘Trust’’). SUMMARY OF APPLICATION: Applicants request an order that permits: (a) Series of certain open-end management investment companies to issue shares (‘‘Shares’’) redeemable in large aggregations only (‘‘Creation Units’’); (b) secondary market transactions in Shares to occur at negotiated market prices; (c) certain series to pay redemption proceeds, under certain circumstances, more than seven days from the tender of Shares for redemption; (d) certain affiliated persons of the series to deposit securities into, and receive securities from, the series in connection with the purchase and redemption of Creation Units; and (e) certain registered management investment companies and unit investment trusts outside of the same group of investment companies as the series to acquire Shares. FILING DATES: The application was filed on October 17, 2007 and amended on August 1, 2008. Applicants have agreed to file an amendment during the notice period, the substance of which is reflected in this notice. HEARING OR NOTIFICATION OF HEARING: An order granting the requested relief will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Commission’s Secretary and serving applicants with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on January 15, 2009, and should be accompanied by proof of service on applicants, in the form of an affidavit or, for lawyers, a certificate of service. Hearing requests should state APPLICANTS: E:\FR\FM\31DEN1.SGM 31DEN1

Agencies

[Federal Register Volume 73, Number 251 (Wednesday, December 31, 2008)]
[Notices]
[Pages 80454-80457]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-31086]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28568; 812-13488]


AdvisorShares Investments, LLC and AdvisorShares Trust; Notice of 
Application

December 23, 2008.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 6(c) of the 
Investment Company Act of 1940 (``Act'') for an exemption from sections 
2(a)(32), 5(a)(1) and 22(d) of the Act and rule 22c-1 under the Act, 
and under sections 6(c) and 17(b) of the Act for an exemption from 
sections 17(a)(1) and (a)(2) of the Act.

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    Applicants: AdvisorShares Investments, LLC (the ``Advisor'') and 
AdvisorShares Trust (the ``Trust'').
    Summary of Application: Applicants request an order that permits: 
(a) Series of certain open-end management investment companies to issue 
shares (``Shares'') redeemable in large aggregations only (``Creation 
Units''); (b) secondary market transactions in Shares to occur at 
negotiated market prices; and (c) certain affiliated persons of the 
series to deposit securities into, and receive securities from, the 
series in connection with the purchase and redemption of Creation 
Units.
    Filing Dates: The application was filed on January 31, 2008, and 
amended on October 17, 2008. Applicants have agreed to file an 
amendment during the notice period, the substance of which is reflected 
in this notice.
    Hearing or Notification of Hearing: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on January 15, 2009, and should be accompanied by proof of 
service on applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-1090. Applicants: Noah Hamman, c/o 
Morgan, Lewis & Bockius LLP, 1111 Pennsylvania Avenue, NW., Washington, 
DC 20004.

FOR FURTHER INFORMATION CONTACT: Courtney S. Thornton, Senior Counsel, 
or Michael W. Mundt, Assistant Director, at (202) 551-6821 (Division of 
Investment Management, Office of Investment Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Desk, 100 F Street, NE., Washington, DC 
20549-1520 (tel. 202-551-5850).

Applicants' Representations

    1. The Trust, a statutory trust established under the laws of 
Delaware, is registered with the Commission as an open-end management 
investment company. The Trust is organized as a series investment 
company with one initial series (the ``Initial Fund''). The investment 
objective of the Initial Fund will be to provide long term growth of 
capital. The Initial Fund and all future series of the Trust (``Future 
Funds,'' collectively with the Initial Fund, ``Funds'') will attempt to 
achieve their investment objectives by utilizing active management 
strategies based on various formulas for asset allocation, security 
selection, and portfolio construction. Each Fund will primarily hold 
shares of underlying exchange traded funds (``ETFs''), as well as 
shares of certain exchange traded products that are not registered as 
investment companies under the Act.\1\ Applicants will only

[[Page 80455]]

invest in unaffiliated ETFs that have received certain exemptive relief 
from the Commission to permit such investments in excess of the limits 
of section 12(d)(1)(A) and (B) of the Act. Any Future Fund (a) will be 
advised by the Advisor or an entity controlled by or under common 
control with the Advisor, and (b) will comply with the terms and 
conditions of the order.
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    \1\ The Funds may invest in exchange traded products that invest 
primarily in commodities or currency, but otherwise operate in a 
manner similar to exchange traded products registered under the Act. 
In addition, the Funds may also invest in equity securities or fixed 
income securities traded in a U.S. or non-U.S. markets, as well as 
futures contracts, options on such futures contracts, swaps, forward 
contracts or other derivatives, and shares of money market mutual 
funds or other investment companies, all in accordance with their 
investment objectives. The Funds may also invest in equity 
securities or fixed income securities traded in international 
markets or in a combination of equity, fixed income and U.S. money 
market securities and/or non-U.S. money market securities.
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    2. The Advisor, a Delaware limited liability company, or a 
subsidiary of such company, will serve as the investment adviser to 
each Fund. The Advisor will be registered as an investment adviser of 
the Investment Advisers Act of 1940 (``Advisers Act'') prior to a Fund 
beginning operations. Applicants anticipate that Funds also may engage 
subadvisors (``Subadvisors'').
    3. Applicants anticipate that shares (``Shares'') of the Funds will 
be sold at a price of between $25 and $200 per Share in Creation Units 
of 25,000 or more Shares. All orders to purchase Creation Units must be 
placed with the principal underwriter and distributor of the Creation 
Units (``Distributor'') by or through a party that has entered into a 
participant agreement with the Distributor (``Authorized 
Participant''). Authorized Participants will include broker-dealers, 
banks, trust companies, and clearing companies that are participants in 
the Depository Trust Company (``DTC,'' and such participants, ``DTC 
Participants''). Purchases of Creation Units of the Funds will be made 
generally by means of an in-kind tender of shares of specific ETFs (the 
``Deposit Securities''), with any cash portion of the purchase price 
(the ``Cash Amount'') to be kept to a minimum. The Cash Amount is an 
amount equal to the difference between the NAV of a Creation Unit and 
the market value of the Deposit Securities. The Trust reserves the 
right to permit, under certain circumstances, a purchaser of Creation 
Units to substitute cash in lieu of depositing some or all of the 
requisite Deposit Securities. The Trust may in the future determine 
that Shares of one or more Funds may be purchased in Creation Units on 
a cash-only basis if the Trust and the Advisor believe such method 
would substantially minimize the Trust's transactional costs or enhance 
its operational efficiencies.
    4. Each Fund will charge a fee (``Transaction Fee'') in connection 
with the sale or redemption of Creation Units to protect existing 
shareholders from the dilutive costs associated with the purchase and 
redemption of Creation Units. Each purchaser of a Creation Unit will 
receive a prospectus (``Prospectus'') that contains complete disclosure 
about the Transaction Fee. All orders to purchase Creation Units must 
be placed with the Distributor no later than the closing time of the 
regular trading session on the NYSE (ordinarily 4 p.m. ET) in order for 
the purchaser to receive the NAV determined on that date. The 
Distributor will transmit all purchase orders to the relevant Fund and 
will also maintain a record of Creation Unit purchases, send out 
confirmations of such purchases, and furnish a Prospectus to purchasers 
of Creation Units.
    5. The Trust intends to list the Shares of each Fund on a national 
securities exchange (``Listing Market'') such as the NYSE. It is 
expected that one or more member firms will be designated to act as a 
specialist and maintain a market for the Shares trading on the Listing 
Market (``Exchange Specialist''). The price of Shares trading on the 
Listing Market will be based on a current bid/offer market. No 
secondary sales will be made to brokers or dealers at a concession by 
the Distributor or by a Fund. Purchases and sales of Shares in the 
secondary market, which will not involve a Fund, will be subject to 
customary brokerage commissions and charges.
    6. Purchasers of Shares in Creation Units may hold such Shares or 
may sell them into the secondary market. Applicants expect that 
purchasers of Creation Units will include institutional investors and 
arbitrageurs, who will purchase or redeem Creation Units of a Fund in 
pursuit of arbitrage profit and thereby enhance the liquidity of the 
secondary market and keep the market price of shares close to their 
NAV. Applicants expect that secondary market purchasers of Shares will 
include both institutional investors and retail investors for whom 
Shares will provide a useful, retail-priced, exchange-traded mechanism 
for investing in a professionally managed, diversified selection of 
ETFs.\2\
---------------------------------------------------------------------------

    \2\ Shares will be registered in book-entry form only. DTC or 
its nominee will be the registered owner of all outstanding Shares. 
DTC or DTC Participants will maintain records reflecting beneficial 
owners of Shares.
---------------------------------------------------------------------------

    7. Shares will not be individually redeemable, and owners of Shares 
may acquire those Shares from a Fund, or tender such Shares for 
redemption to the Fund, in Creation Units only. To redeem, an investor 
will have to accumulate enough Shares to constitute a Creation Unit. 
Redemption orders must be placed by or through an Authorized 
Participant. A redeeming investor will receive a basket of securities 
designated to be delivered for Creation Unit redemptions on the date 
that the request for redemption is submitted (``Redemption 
Securities''), which in most cases will be the same as the Deposit 
Securities required to purchase Creation Units on that date, and will 
either receive from or pay to the Fund a balancing amount in cash. A 
Fund may make redemptions partly in cash in lieu of transferring one or 
more Redemption Securities to a redeeming investor if the Fund 
determines that such alternative is warranted, such as if the redeeming 
investor is unable, by law or policy, to own a particular Redemption 
Security. A redeeming investor also must pay a Transaction Fee to cover 
custodial costs.
    8. The Trust will not be advertised or marketed or otherwise ``held 
out'' as a traditional open-end investment company or a mutual fund. 
The designation of the Trust and the Funds in all marketing materials 
will be limited to the terms ``exchange-traded fund,'' ``investment 
company,'' ``fund'' and ``trust'' without reference to an ``open-end 
fund'' or a ``mutual fund,'' except to compare and contrast the Trust 
and the Funds with traditional mutual funds. Each Fund's Prospectus 
will also prominently disclose that the Fund is an actively managed 
exchange traded fund. All marketing materials that describe the method 
of obtaining, buying or selling Creation Units, or Shares traded on the 
Listing Market, or refer to redeemability, will prominently disclose 
that Shares are not individually redeemable and that the owners of 
Shares may acquire or redeem Shares from a Fund in Creation Units only. 
The same approach will be followed in the statement of additional 
information (``SAI''), shareholder reports and investor educational 
materials issued or circulated in connection with the Shares. The Trust 
will provide copies of its annual and semi-annual shareholder reports 
to DTC Participants for distribution to beneficial owners of Shares.
    9. The Trust (or the Listing Market) intends to maintain a Web site 
that will be publicly available at no charge, which will include the 
Prospectus and other information about the Funds that is updated on a 
daily basis. On each Business Day, before the commencement of trading 
in Shares on the Listing Market, each Fund will disclose the identities 
and quantities of the securities (``Portfolio Securities'') and other 
assets held in the Fund portfolio that will form the basis for the

[[Page 80456]]

Fund's calculation of NAV at the end of the Business Day.\3\
---------------------------------------------------------------------------

    \3\ Applicants note that under accounting procedures followed by 
the Fund, trades made on the prior Business Day (``T'') will be 
booked and reflected in NAV on the current Business Day (``T + 1''). 
Accordingly, the Fund will be able to disclose at the beginning of 
the Business Day the portfolio that will form the basis for the NAV 
calculation at the end of the Business Day.
---------------------------------------------------------------------------

Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act 
granting an exemption from sections 2(a)(32), 5(a)(1) and 22(d) of the 
Act and rule 22c-1 under the Act, and under sections 6(c) and 17(b) of 
the Act granting an exemption from sections 17(a)(1) and (a)(2) of the 
Act.
    2. Section 6(c) of the Act provides that the Commission may exempt 
any person, security or transaction, or any class of persons, 
securities or transactions, from any provision of the Act, if and to 
the extent that such exemption is necessary or appropriate in the 
public interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act. 
Section 17(b) of the Act authorizes the Commission to exempt a proposed 
transaction from section 17(a) of the Act if evidence establishes that 
the terms of the transaction, including the consideration to be paid or 
received, are reasonable and fair and do not involve overreaching on 
the part of any person concerned, and the proposed transaction is 
consistent with the policies of the registered investment company and 
the general provisions of the Act.
Sections 5(a)(1) and 2(a)(32) of the Act
    3. Section 5(a)(1) of the Act defines an ``open-end company'' as a 
management investment company that is offering for sale or has 
outstanding any redeemable security of which it is the issuer. Section 
2(a)(32) of the Act defines a redeemable security as any security, 
other than short-term paper, under the terms of which the holder, upon 
its presentation to the issuer, is entitled to receive approximately 
his proportionate share of the issuer's current net assets, or the cash 
equivalent. Because Shares will not be individually redeemable, 
applicants request an order that would permit each Fund, as a series of 
an open-end management investment company, to issue Shares that are 
redeemable in Creation Units only. Applicants state that Creation Units 
will always be redeemable. Applicants further state that because 
Creation Units may always be purchased and redeemed at NAV (less 
certain transactional expenses), the price of Creation Units on the 
secondary market and the price of the individual Shares of a Creation 
Unit, taken together, should not vary substantially from the NAV of 
Creation Units.
Section 22(d) of the Act and Rule 22c-1 under the Act
    4. Section 22(d) of the Act, among other things, prohibits a dealer 
from selling a redeemable security, which is currently being offered to 
the public by or through a principal underwriter, except at a current 
public offering price described in the prospectus. Rule 22c-1 under the 
Act generally requires that a dealer selling, redeeming, or 
repurchasing a redeemable security do so only at a price based on its 
NAV. Applicants state that trading in Shares will take place on and 
away from the Listing Market at all times on the basis of current bid/
offer prices, not at a current offering price described in the 
prospectus, and not at a price based on NAV. Thus, purchases and sales 
of Shares in the secondary market will not comply with section 22(d) of 
the Act and rule 22c-1 under the Act. Applicants request an exemption 
under section 6(c) from these provisions.
    5. Applicants assert that the concerns sought to be addressed by 
section 22(d) of the Act and rule 22c-1 under the Act with respect to 
pricing are equally satisfied by the proposed method of pricing Shares. 
Applicants maintain that while there is little legislative history 
regarding section 22(d), its provisions, as well as those of rule 22c-
1, appear to have been designed to (a) prevent dilution caused by 
certain riskless-trading schemes by principal underwriters and contract 
dealers, (b) prevent unjust discrimination or preferential treatment 
among buyers, and (c) assure an orderly distribution of investment 
company shares by contract dealers by eliminating price competition 
from non-contract dealers who could offer investors shares at less than 
the published sales price and who could pay investors a little more 
than the published redemption price.
    6. Applicants believe that none of these purposes will be relevant 
issues for secondary trading by dealers in Shares of a Fund. Applicants 
state that (a) secondary market trading in Shares will not cause 
dilution for owners of such Shares because such transactions do not 
directly involve Fund assets, and (b) to the extent different prices 
exist during a given trading day, or from day to day, such variances 
occur as a result of third-party market forces, such as supply and 
demand, but do not occur as a result of unjust or discriminatory 
manipulation. Finally, applicants contend that the proposed 
distribution system will be orderly because arbitrage activity will 
ensure that the difference between the market price of Shares and their 
NAV remains narrow.
Sections 17(a)(1) and 17(a)(2) of the Act
    7. Section 17(a)(1) and (2) of the Act generally prohibit an 
affiliated person of a registered investment company, or an affiliated 
person of such a person (``second tier affiliate''), from selling any 
security to or purchasing any security from the company. Section 
2(a)(3) of the Act defines ``affiliated person'' to include any person 
directly or indirectly owning, controlling, or holding with power to 
vote 5 percent or more of the outstanding voting securities of the 
other person and any person directly or indirectly controlling, 
controlled by, or under common control with, the other person. Section 
2(a)(9) of the Act provides that a control relationship will be 
presumed where one person owns more than 25 percent of another person's 
voting securities. The Funds may be deemed to be controlled by the 
Advisor or an entity controlling, controlled by or under common control 
with the Adviser and hence affiliated persons of each other. In 
addition, the Funds may be deemed to be under common control with any 
other registered investment company (or series thereof) advised by the 
Advisor or an entity controlling, controlled by or under common control 
with the Advisor (an ``Affiliated Fund''). Applicants state that an 
investor could own 5 percent or more of a Fund or the Trust, or in 
excess of 25 percent of the outstanding Shares of a Fund or the Trust, 
making that investor an affiliated person of the Fund or the Trust 
under section 2(a)(3)(A) or 2(a)(3)(C) of the Act. For so long as such 
an investor was deemed to be an affiliated person, section 17(a)(1) 
could be read to prohibit that investor from depositing the Deposit 
Securities with a Fund in return for a Creation Unit. Similarly, 
section 17(a)(2) could be read to prohibit such an investor from 
entering into an in-kind redemption with a Fund.
    8. Applicants request an exemption from section 17(a) under 
sections 6(c) and 17(b), to permit in-kind purchases and redemptions by 
persons that are affiliated persons or second tier affiliates of the 
Funds solely by virtue of one or more of the following: (1) Holding 5 
percent or more, or more than 25 percent, of the outstanding Shares of 
the Trust or one or more Funds; (2) an affiliation with a person with 
an ownership interest described in (1); or

[[Page 80457]]

(3) holding 5 percent or more, or more than 25 percent, of the shares 
of one or more Affiliated Funds.
    9. Applicants contend that no useful purpose would be served by 
prohibiting the affiliated persons or second tier affiliates of a Fund 
as described above from purchasing or redeeming Creation Units through 
``in-kind'' transactions. The purchase and redemption of Creation Units 
of each Fund is on the same terms for all investors, whether or not 
such investor is an affiliate. In each case, Creation Units are sold 
and redeemed by the Trust at their NAV. The Deposit Securities and 
Redemption Securities will be valued in the same manner as the 
securities in the Fund portfolio. Accordingly, applicants believe the 
proposed transactions described above meet the section 17(b) standards 
for relief because the terms of such proposed transactions are 
reasonable and fair and do not involve overreaching on the part of any 
person concerned, and the proposed transactions will be consistent with 
the policies of each Fund and with the general purposes of the Act.

Applicants' Conditions

    The applicants agree that any order of the Commission granting the 
requested relief will be subject to the following conditions:
    1. Neither the Trust nor any Fund will be advertised or marketed as 
an open-end investment company or mutual fund. Each Fund's Prospectus 
will prominently disclose that the Fund is an actively managed 
exchange-traded fund. Each Prospectus will prominently disclose that 
the Shares are not individually redeemable shares and will disclose 
that the owners of the Shares may acquire those Shares from the Fund 
and tender those Shares for redemption to the Fund in Creation Units 
only. Any advertising material that describes the purchase or sale of 
Creation Units or refers to redeemability will prominently disclose 
that the Shares are not individually redeemable and that owners of the 
Shares may acquire those Shares from the Fund and tender those Shares 
for redemption to the Fund in Creation Units only.
    2. Each Fund's Prospectus will clearly disclose that, for purposes 
of the Act, Shares are issued by a registered investment company and 
that the acquisition of Shares by investment companies and companies 
relying on sections 3(c)(1) or 3(c)(7) of the Act is subject to the 
restrictions of section 12(d)(1) of the Act.
    3. The Web site for the Funds, which will be publicly accessible at 
no charge, will contain the following information, on a per Share 
basis, for each Fund: (a) The prior Business Day's NAV and the reported 
closing price, and a calculation of the premium or discount of the 
closing price against such NAV; and (b) data in chart format displaying 
the frequency distribution of discounts and premiums of the daily 
closing price against the NAV, within appropriate ranges, for each of 
the four previous calendar quarters (or for the life of the Fund, if 
shorter).
    4. The Prospectus and annual report for each Fund will also 
include: (a) The information listed in condition 3(b), (i) in the case 
of the Prospectus, for the most recently completed year (and the most 
recently completed quarter or quarters, as applicable) and (ii) in the 
case of the annual report, for the immediately preceding five years (or 
for the life of the Fund, if shorter), and (b) the cumulative total 
return and the average annual total return based on NAV and closing 
price, calculated on a per Share basis for one-, five- and ten-year 
periods (or life of the Fund, if shorter).
    5. As long as the Funds operate in reliance on the requested order, 
the Shares of the Funds will be listed on a Listing Market.
    6. On each Business Day, before commencement of trading in Shares 
on a Fund's Listing Market, the Fund will disclose on its Web site the 
identities and weightings of the component securities and other assets 
held by the Fund that will form the basis for the Fund's calculation of 
NAV at the end of the Business Day.
    7. The Advisor or any Subadvisor, directly or indirectly, will not 
cause any Authorized Participant (or any investor on whose behalf an 
Authorized Participant may transact with the Fund) to acquire any 
Deposit Security for the Fund through a transaction in which the Fund 
could not engage directly.
    8. The requested order will expire on the effective date of any 
Commission rule under the Act that provides relief permitting the 
operation of actively managed exchange-traded funds.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-31086 Filed 12-30-08; 8:45 am]
BILLING CODE 8011-01-P
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