Pacific Investment Management Company LLC and PIMCO ETF Trust; Notice of Application, 22772-22778 [E9-11301]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 74, Number 92 (Thursday, May 14, 2009)]
[Notices]
[Pages 22772-22778]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-11301]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28723; File No. 812-13555]


Pacific Investment Management Company LLC and PIMCO ETF Trust; 
Notice of Application

May 11, 2009.
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 (the ``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, 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 
12(d)(1)(B) of the Act.

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SUMMARY: Summary of Application: Applicants request an order that would 
permit (a) series of certain open-end management investment companies 
whose portfolios will consist of the component securities of certain 
domestic, global or international fixed income securities indexes to 
issue shares (``Shares'') redeemable in large aggregations only 
(``Creation Unit Aggregations''); (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 
after 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 Unit Aggregations; 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.
    Applicants: Pacific Investment Management LLC (the ``Adviser'') and 
PIMCO ETF Trust (the ``Trust'').

DATES: Filing Dates: The application was filed on July 29, 2008 and 
amended on April 29, 2009. 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 
application will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on May 29, 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, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090; Applicants, 840 Newport Center Drive, 
Newport Beach, California 92600.

FOR FURTHER INFORMATION CONTACT: Laura J. Riegel, Senior Counsel at 
(202) 551-6873, or Marilyn Mann, Branch Chief, at (202) 551-6820 
(Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's Web site by searching for the file number, or an applicant 
using the Company name box, at https://www.sec.gov/search/search.htm or 
by calling (202) 551-8090.

Applicants' Representations

    1. The Trust is registered as an open-end management investment 
company and is organized as a Delaware statutory trust that will offer 
an unlimited number of series. The Trust will initially offer one 
series (``Initial Fund'') whose performance will correspond generally 
to the total return of a specified fixed income securities index 
(``Underlying Index'').\1\
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    \1\ The Index for the Initial Fund is Merrill Lynch 1-3 Year 
U.S. Treasury Index\SM\.
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    2. Applicants request that the order apply to the Initial Fund and 
any additional series of the Trust and any other open-end management 
investment companies or series thereof, that may be created in the 
future and that track a specified fixed income securities Underlying 
Index (``Future Funds'').\2\ Any Future Fund will be (a) advised by the 
Adviser or an entity controlling, controlled by, or under common 
control with the Adviser, and (b) comply with the terms and conditions 
of the application. Future Funds may be based on Underlying Indexes 
comprised of domestic fixed income securities (``Domestic Funds'') or 
Underlying Indexes comprised on global or international fixed income 
securities (``Global Funds''). The Initial Fund and Future Funds, 
together, are the ``Funds.''
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    \2\ All entities that currently intend to rely on the order have 
been named as Applicants. Any other existing or future entity that 
subsequently relies on the order will comply with the terms and 
conditions of the application. An Acquiring Fund (as defined below) 
may rely on the order only to invest in Funds and not in any other 
registered investment company.
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    3. The Adviser is registered as an investment adviser under the 
Investment Advisers Act of 1940, as amended (the ``Advisers Act'') and 
will be the investment adviser to the Funds. The Adviser may enter into 
sub-advisory agreements with one or more investment advisers each of 
which will serve as a sub-adviser to a Fund (each, a ``Subadviser''). 
Each Subadviser will be registered under the Advisers Act. Allianz 
Global Investors Distributors LLC (``Distributor'') is a broker-dealer 
registered under the Securities Exchange Act of 1934 (the ``Exchange 
Act'') and will act as the principal

[[Page 22773]]

underwriter and distributor for the Creation Unit Aggregations of 
Shares.
    4. Each Fund will consist of a portfolio of securities (``Portfolio 
Securities'') selected to correspond generally to the total return of a 
specified fixed income securities Index. No entity that creates, 
compiles, sponsors or maintains an Index (``Index Provider'') is or 
will be an affiliated person, as defined in section 2(a)(3) of the Act, 
or an affiliated person of an affiliated person, of the Trust, a Fund, 
the Adviser, any Subadviser, or promoter of a Fund, or of the 
Distributor.
    5. The investment objective of each Fund will be to provide 
investment results that closely correspond to the total return of its 
Underlying Index.\3\ The total return of the Underlying Index will be 
disseminated once each ``Business Day,'' which is defined as any day 
that a Fund is required to be open under section 22(e) of the Act, at 
the end of the Business Day. A Fund will utilize either a replication 
or representative sampling strategy which will be disclosed with regard 
to each Fund in its prospectus (``Prospectus'').\4\ A Fund using a 
replication strategy will invest in substantially all of the Component 
Securities in its Underlying Index in approximately the same 
approximate proportions as in the Underlying Index. A Fund using a 
representative sampling strategy will attempt to match the risk and 
return characteristics of a Fund's portfolio to the risk and return 
characteristics of its Underlying Index.\5\ Applicants state that use 
of the representative sampling strategy may prevent a Fund from 
tracking the performance of its Underlying Index with the same degree 
of accuracy as would a Fund that invests in every Component Security of 
the Underlying Index. Applicants expect that each Fund will have a 
tracking error relative to the performance of its Underlying Index of 
less than 5 percent.
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    \3\ Applicants represent that each Fund will invest at least 80% 
of its total assets (exclusive of collateral held from securities 
lending) in the component securities that comprise its Underlying 
Index (``Component Securities''). Each Fund also may invest up to 
20% of its total assets in futures contracts, options on future 
contracts, options and swaps, cash, cash equivalents, other 
investment companies, and securities that are not Component 
Securities but which the Adviser believes will assist the Fund in 
tracking the performance of its Underlying Index.
    \4\ All representations and conditions contained in the 
application that require a Fund to disclose particular information 
in the Fund's Prospectus and/or annual report shall be effective 
with respect to the Fund until the time that the Fund complies with 
the disclosure requirements adopted by the Commission in Investment 
Company Act Release No. 28584 (Jan. 13, 2009).
    \5\ Under the representative sampling strategy, the Adviser will 
seek to construct a Fund's portfolio so that its duration, sector, 
credit rating, coupon and option characteristics closely correlate 
to those characteristics of the Underlying Index.
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    6. Creation Unit Aggregations are expected to consist of 100,000 
Shares and to have an initial price in the range of $1,000,000 to 
$10,000,000. All orders to purchase Creation Unit Aggregations must be 
placed with the Distributor by or through a party that has entered into 
an agreement with the Distributor (``Authorized Participant''). The 
Distributor will be responsible for transmitting the orders to the 
Funds. An Authorized Participant must be a participant in the 
Depository Trust Company (``DTC'', and such participant, ``DTC 
Participant''). Shares of the Fund generally will be sold in Creation 
Unit Aggregations in exchange for an in-kind deposit by the purchaser 
of a portfolio of fixed-income securities designated by the Adviser to 
correspond generally to the total return of the relevant Underlying 
Index (the ``Deposit Securities''), together with the deposit of a 
specified cash payment (``Cash Amount'' and collectively with the 
Deposit Securities, ``Creation Deposit''). The Cash Amount is an amount 
equal to the difference between (a) the net asset value (``NAV'') (per 
Creation Unit Aggregation) of a Fund and (b) the total aggregate market 
value (per Creation Unit Aggregation) of the Deposit Securities.\6\ 
Each Fund may permit a purchaser of Creation Unit Aggregations to 
substitute cash in lieu of depositing some or all of the Deposit 
Securities if the method would reduce the Fund's transaction costs or 
enhance the Fund's operating efficiency. To preserve maximum efficiency 
and flexibility, a Fund reserves the right to accept and deliver 
Creation Unit Aggregations entirely for cash (``All-Cash Payment'').
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    \6\ Each Fund will sell and redeem Creation Unit Aggregations 
only on a Business Day. Each Business Day, prior to the opening of 
trading on the ``Primary Listing Exchange'' (defined below), a list 
of securities and the required number of shares of each Deposit 
Security to be included in the Creation Deposit for each Fund or 
cash information for each Fund, including when the purchase of 
Creation Unit Aggregations from the Fund is an All-Cash Payment will 
be made available. In addition, the All-Cash Payment will be 
disclosed, if applicable. Any national securities exchange (as 
defined in section 2(a)(26) of the Act) (``Exchange'') on which 
Shares are listed will disseminate, every 15 seconds during its 
regular trading hours, through the facilities of the Consolidated 
Tape, an amount per individual Share representing the sum of the 
estimated Cash Amount and the current value of the Deposit 
Securities. The Primary Listing Exchange is the Exchange on which 
the Shares of a Fund are primarily listed.
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    7. An investor acquiring or redeeming a Creation Unit Aggregation 
from a Fund will be charged a fee (``Transaction Fee'') to prevent the 
dilution of the interests of the remaining shareholders resulting from 
costs in connection with the purchase or redemption of Creation Unit 
Aggregations.\7\ The maximum Transaction Fees relevant to each Fund and 
the method of calculating such Transaction Fees will be fully disclosed 
in the Prospectus of such Fund or statement of additional information 
(``SAI''). The Distributor also will be responsible for delivering the 
Fund's Prospectus to those persons acquiring Shares in Creation Unit 
Aggregations and for maintaining records of both the orders placed with 
it and the confirmations of acceptance furnished by it. In addition, 
the Distributor will maintain a record of the instructions given to the 
applicable Fund to implement the delivery of its Shares.
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    \7\ Where a Fund permits a purchaser to substitute cash in lieu 
of depositing a portion of the requisite Deposit Securities, the 
purchaser may be assessed a higher Transaction Fee to cover the cost 
of purchasing such Deposit Securities.
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    8. Purchasers of Shares in Creation Unit Aggregations may hold such 
Shares or may sell such Shares into the secondary market. Shares will 
be listed and traded on an Exchange. It is expected that one or more 
member firms of a Listing Exchange will be designated to act as a 
specialist or a market maker (each, an ``Exchange Specialist'') and 
maintain a market for Shares trading on the Listing Exchange. Prices of 
Shares trading on an Exchange will be based on the current bid/ask 
market. Shares sold in the secondary market will be subject to 
customary brokerage commissions and charges.
    9. Applicants expect that purchasers of Creation Unit Aggregations 
will include institutional investors and arbitrageurs (which could 
include institutional investors). Authorized Participants also may 
purchase Creation Unit Aggregations for use in market-making 
activities. Applicants expect that secondary market purchasers of 
Shares will include both institutional investors and retail 
investors.\8\ Applicants expect that the price at which Shares trade 
will be disciplined by arbitrage opportunities created by the option to 
continually purchase or redeem Creation Unit Aggregations at their NAV, 
which should ensure that Shares will not trade at a material discount 
or premium in relation to their NAV.
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    \8\ 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.
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    10. Shares will not be individually redeemable, and owners of 
Shares may

[[Page 22774]]

acquire those Shares from the Fund, or tender such Shares for 
redemption to the Fund, in Creation Unit Aggregations only. To redeem, 
an investor will have to accumulate enough Shares to constitute a 
Creation Unit Aggregation. Redemption orders must be placed by or 
through an Authorized Participant. An investor redeeming a Creation 
Unit Aggregation generally will receive (a) Portfolio Securities 
designated to be delivered for redemptions (``Redemption Securities'') 
on the date that the request for redemption is submitted and (b) a 
``Cash Redemption Payment,'' consisting of an amount calculated in the 
same manner as the Cash Amount, although the actual amount of the Cash 
Redemption Payment may differ if the Redemption Securities are not 
identical to the Deposit Securities on that day. An investor may 
receive the cash equivalent of a Redemption Security in certain 
circumstances, such as if the investor is constrained from effecting 
transactions in the security by regulation or policy.\9\ A redeeming 
investor may pay a Transaction Fee, calculated in the same manner as a 
Transaction Fee payable in connection with purchases of Creation Unit 
Aggregations.
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    \9\ Applicants state that a cash-in-lieu amount will replace any 
``to-be-announced'' (``TBA'') transaction that is listed as a 
Deposit Security or Redemption Security of any Fund. A TBA 
transaction is a method of trading mortgage-backed securities where 
the buyer and seller agree upon general trade parameters such as 
agency, settlement date, par amount and price. The actual pools 
delivered generally are determined two days prior to the settlement 
date. The amount of substituted cash in the case of TBA transactions 
will be equivalent to the value of the TBA transaction listed as a 
Deposit Security or a Redemption Security.
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    11. Applicants state that in accepting Deposit Securities and 
satisfying redemptions with Redemption Securities, the relevant Funds 
will comply with the Federal securities laws, including that the 
Deposit Securities and Redemption Securities are sold in transactions 
that would be exempt from registration under the Securities Act of 1933 
(``Securities Act'').\10\ The specified Deposit Securities and 
Redemption Securities generally will correspond pro rata, to the extent 
practicable, to the Portfolio Securities of a Fund. In some cases, 
because it is often impossible to break up bonds beyond certain minimum 
sizes needed for transfer and settlement, there may be minor 
differences between a basket of the Deposit Securities or Redemption 
Securities and a true pro rata slice of a Fund's Portfolio Securities.
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    \10\ In accepting Deposit Securities and satisfying redemptions 
with Redemption Securities that are restricted securities eligible 
for resale pursuant to rule 144A under the Securities Act, the 
relevant Funds will comply with the conditions of rule 144A. The 
Prospectus will also state that an Authorized Participant that is 
not a ``Qualified Institutional Buyer'' as defined in rule 144A 
under the Securities Act will not be able to receive, as part of a 
redemption, restricted securities eligible for resale under rule 
144A.
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    12. Neither the Trust nor any individual Fund will be marketed or 
otherwise held out as a traditional open-end investment company or a 
mutual fund. Instead, each Fund will be marketed as an ``ETF,'' an 
``investment company,'' a ``fund,'' or a ``trust.'' All marketing 
materials that describe the features or method of obtaining, buying or 
selling Creation Unit Aggregations or Shares traded on an Exchange, or 
refer to redeemability, will prominently disclose that Shares are not 
individually redeemable and that the owners of Shares may purchase or 
redeem Shares from the Fund in Creation Unit Aggregations only. The 
same approach will be followed in the SAI, shareholder reports and 
investor educational materials issued or circulated in connection with 
the Shares. The Funds will provide copies of their annual and semi-
annual shareholder reports to DTC Participants for distribution to 
shareholders.

Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the 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, under sections 6(c) and 17(b) of the Act 
for an exemption from sections 17(a)(1) and 17(a)(2) of the Act, and 
under section 12(d)(1)(J) of the Act for an exemption from sections 
12(d)(1)(A) and 12(d)(1)(B) 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. Section 12(d)(1)(J) of the Act 
provides that the Commission may exempt any person, security, or 
transaction, or any class or classes of persons, securities or 
transactions, from any provisions of section 12(d)(1) if the exemption 
is consistent with the public interest and the protection of investors.

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 owner, 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 the Funds to register as 
open-end management investment companies and issue Shares that are 
redeemable in Creation Unit Aggregations only. Applicants state that 
investors may purchase Shares in Creation Unit Aggregations and redeem 
Creation Unit Aggregations from each Fund. Applicants state that 
because Creation Unit Aggregations may always be purchased and redeemed 
at NAV, the market price of the Shares should not vary substantially 
from their NAV.

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 secondary market trading in Shares will take 
place at negotiated prices, not at a current offering price described 
in a Fund's 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

[[Page 22775]]

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) ensure an orderly distribution of investment company shares by 
eliminating price competition from dealers offering shares at less than 
the published sales price and repurchasing shares at more than the 
published redemption price.
    6. Applicants believe that none of these purposes will be thwarted 
by permitting Shares to trade in the secondary market at negotiated 
prices. Applicants state that (a) secondary market trading in Shares 
does not involve a Fund as a party and will not result in dilution of 
an investment in Shares, 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. 
Therefore, applicants assert that secondary market transactions in 
Shares will not lead to discrimination or preferential treatment among 
purchasers. Finally, applicants contend that the proposed distribution 
system will be orderly because competitive forces will ensure that the 
difference between the market price of Shares and their NAV remains 
narrow.

Section 22(e)

    7. Section 22(e) of the Act generally prohibits a registered 
investment company from suspending the right of redemption or 
postponing the date of payment of redemption proceeds for more than 
seven days after the tender of a security for redemption. Applicants 
state that settlement of redemptions for a Global Fund is contingent 
not only on the settlement cycle of the United States market, but also 
on current delivery cycles in local markets for underlying foreign 
securities held by the Global Fund. Applicants state that delivery 
cycles for transferring Portfolio Securities to redeeming investors, 
coupled with local market holiday schedules, will require a delivery 
process longer than seven calendar days for a Global Fund. Applicants 
request relief under section 6(c) of the Act from section 22(e) to 
allow a Global Fund to pay redemption proceeds up to 12 calendar days 
after the tender of any Creation Unit Aggregations for redemption. 
Except as disclosed in the relevant Global Fund's Prospectus and/or 
SAI, applicants expect that each Global Fund will be able to deliver 
redemption proceeds within seven days.\11\
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    \11\ Rule 15c6-1 under the Exchange Act requires that most 
securities transactions be settled within three business days of the 
trade. Applicants acknowledge that no relief obtained from the 
requirements of section 22(e) will affect any obligations applicants 
may have under rule 15c6-1.
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    8. Applicants state that section 22(e) was designed to prevent 
unreasonable, undisclosed and unforeseen delays in the payment of 
redemption proceeds. Applicants assert that the requested relief will 
not lead to the problems that section 22(e) was designed to prevent. 
Applicants state that the SAI will disclose those local holidays (over 
the period of at least one year following the date of the SAI), if any, 
that are expected to prevent the delivery of redemption proceeds in 
seven calendar days, and the maximum number of days needed to deliver 
the proceeds for the relevant Global Fund. Applicants are not seeking 
relief from section 22(e) with respect to Global Funds that do not 
effect creations and redemptions of Creation Unit Aggregations in-kind.

Section 12(d)(1)

    9. Section 12(d)(1)(A) of the Act, in relevant part, prohibits a 
registered investment company from acquiring securities of an 
investment company if such securities represent more than 3% of the 
total outstanding voting stock of the acquired company, more than 5% of 
the total assets of the acquiring company, or, together with the 
securities of any other investment companies, more than 10% of the 
total assets of the acquiring company. Section 12(d)(1)(B) of the Act 
prohibits a registered open-end investment company, its principal 
underwriter and any other broker-dealer from selling the investment 
company's shares to another investment company if the sale will cause 
the acquiring company to own more than 3% of the acquired company's 
voting stock, or if the sale will cause more than 10% of the acquired 
company's voting stock to be owned by investment companies generally.
    10. Applicants request an exemption to permit management investment 
companies (``Acquiring Management Companies'') and unit investment 
trusts (``Acquiring Trusts'') registered under the Act that are not 
sponsored or advised by the Adviser or any entity controlling, 
controlled by, or under common control with the Adviser and are not 
part of the same ``group of investment companies,'' as defined in 
section 12(d)(1)(G)(ii) of the Act, as the Funds (collectively, 
``Acquiring Funds'') to acquire shares of a Fund beyond the limits of 
section 12(d)(1)(A). In addition, applicants seek relief to permit a 
Fund or broker-dealer that is registered under the Exchange Act 
(``Broker'') to sell Shares to a Acquiring Fund in excess of the limits 
of section 12(d)(1)(B).
    11. Each Acquiring Management Company will be advised by an 
investment adviser within the meaning of section 2(a)(20)(A) of the Act 
(the ``Acquiring Fund Adviser'') and may be sub-advised by one or more 
investment advisers within the meaning of section 2(a)(20)(B) of the 
Act (each a ``Acquiring Fund SubAdviser''). Any investment adviser to 
an Acquiring Fund will be registered under the Advisers Act. Each 
Acquiring Trust will be sponsored by a sponsor (``Sponsor'').
    12. Applicants submit that the proposed conditions to the requested 
relief adequately address the concerns underlying the limits in section 
12(d)(1)(A) and (B), which include concerns about undue influence by a 
fund of funds over underlying funds, excessive layering of fees and 
overly complex fund structures. Applicants believe that the requested 
exemption is consistent with the public interest and the protection of 
investors.
    13. Applicants believe that neither the Acquiring Funds nor an 
Acquiring Fund Affiliate would be able to exert undue influence over 
the Funds.\12\ To limit the control that a Acquiring Fund may have over 
a Fund, applicants propose a condition prohibiting an Acquiring Fund 
Adviser or a Sponsor, any person controlling, controlled by, or under 
common control with the Acquiring Fund Adviser or Sponsor, and any 
investment company or issuer that would be an investment company but 
for section 3(c)(1) or 3(c)(7) of the Act that is advised or sponsored 
by the Acquiring Fund Adviser or Sponsor, or any person controlling, 
controlled by, or under common control with the Acquiring Fund Adviser 
or Sponsor (``Acquiring Fund's Advisory Group'') from controlling 
(individually or in the aggregate) a Fund within the meaning of section 
2(a)(9) of the Act. The same prohibition would apply to any Acquiring 
Fund SubAdviser, any person controlling, controlled by or under common 
control with the Acquiring Fund SubAdviser, and any investment

[[Page 22776]]

company or issuer that would be an investment company but for section 
3(c)(1) or 3(c)(7) of the Act (or portion of such investment company or 
issuer) advised or sponsored by the Acquiring Fund SubAdviser or any 
person controlling, controlled by or under common control with the 
Acquiring Fund SubAdviser (``Acquiring Fund's SubAdvisory Group''). 
Applicants propose other conditions to limit the potential for undue 
influence over the Funds, including that no Acquiring Fund or Acquiring 
Fund Affiliate (except to the extent it is acting in its capacity as an 
investment adviser to a Fund) will cause a Fund to purchase a security 
in an offering of securities during the existence of an underwriting or 
selling syndicate of which a principal underwriter is an Underwriting 
Affiliate (``Affiliated Underwriting''). An ``Underwriting Affiliate'' 
is a principal underwriter in any underwriting or selling syndicate 
that is an officer, director, member of an advisory board, Acquiring 
Fund Adviser, Acquiring Fund SubAdviser, Sponsor, or employee of the 
Acquiring Fund, or a person of which any such officer, director, member 
of an advisory board, Acquiring Fund Adviser, Acquiring Fund 
SubAdviser, Sponsor, or employee is an affiliated person (except that 
any person whose relationship to the Fund is covered by section 10(f) 
of the Act is not an Underwriting Affiliate).
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    \12\ An ``Acquiring Fund Affiliate'' is the Acquiring Fund 
Adviser, Acquiring Fund SubAdviser(s), any Sponsor, promoter, or 
principal underwriter of an Acquiring Fund, and any person 
controlling, controlled by, or under common control with any of 
those entities. A ``Fund Affiliate'' is the investment adviser, 
promoter, or principal underwriter of an Acquiring Fund and any 
person controlling, controlled by or under common control with any 
of these entities.
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    14. Applicants assert that the proposed conditions address any 
concerns regarding excessive layering of fees. The board of directors 
or trustees of any Acquiring Management Company, including a majority 
of the disinterested directors or trustees, will find that the advisory 
fees charged to the Acquiring Management Company are based on services 
provided that will be in addition to, rather than duplicative of, 
services provided under the advisory contract(s) of any Fund in which 
the Acquiring Management Company may invest. In addition, except as 
provided in condition 15, an Acquiring Fund Adviser or a trustee 
(``Trustee'') or Sponsor of an Acquiring Trust will, as applicable, 
waive fees otherwise payable to it by the Acquiring Fund in an amount 
at least equal to any compensation (including fees received pursuant to 
any plan adopted by a Fund under rule 12b-1 under the Act) received by 
the Acquiring Fund Adviser, Trustee or Sponsor or an affiliated person 
of the Acquiring Fund Adviser, Trustee or Sponsor, from the Funds in 
connection with the investment by the Acquiring Fund in the Fund. 
Applicants state that any sales charges or service fees charged with 
respect to shares of a Acquiring Fund will not exceed the limits 
applicable to a fund of funds set forth in NASD Conduct Rule 2830.\13\
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    \13\ Any references to NASD Conduct Rule 2830 include any 
successor or replacement rule to NASD Conduct Rule 2830 that may be 
adopted by the Financial Industry Regulatory Authority.
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    15. Applicants submit that the proposed arrangement will not create 
an overly complex fund structure. Applicants note that no Fund may 
acquire securities of any investment company or company relying on 
section 3(c)(1) or 3(c)(7) of the Act in excess of the limits contained 
in section 12(d)(1)(A) of the Act, except to the extent permitted by 
exemptive relief from the Commission permitting the Fund to purchase 
shares of other investment companies for short-term cash management 
purposes. To ensure that Acquiring Funds comply with the terms and 
conditions of the requested relief from section 12(d)(1), any Acquiring 
Fund that intends to invest in a Fund in reliance on the requested 
order will enter into an agreement (``Acquiring Fund Agreement'') 
between the Fund and the Acquiring Fund requiring the Acquiring Fund to 
adhere to the terms and conditions of the requested order. The 
Acquiring Fund Agreement also will include an acknowledgement from the 
Acquiring Fund that it may rely on the requested order only to invest 
in Funds and not in any other investment company.
    16. Applicants also note that a Fund may choose to reject a direct 
purchase of Shares in Creation Unit Aggregations by an Acquiring Fund. 
To the extent that a Acquiring Fund purchases Shares in the secondary 
market, a Fund would still retain its ability to reject initial 
purchases of Shares made in reliance on the requested order by 
declining to enter into the Acquiring Fund Agreement prior to any 
investment by an Acquiring Fund in excess of the limits of section 
12(d)(1)(A).

Sections 17(a)(1) and (2) of the Act

    17. Section 17(a) of the Act generally prohibits 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 acquiring any security from the company. Section 2(a)(3) of the Act 
defines ``affiliated person'' to include (a) any person directly or 
indirectly owning, controlling or holding with power to vote 5% or more 
of the outstanding voting securities of the other person, (b) any 
person 5% or more of whose outstanding voting securities are directly 
or indirectly owned, controlled or held with the power to vote by the 
other person, and (c) 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% of another person's voting 
securities.
    18. Applicants request an exemption from section 17(a) of the Act 
pursuant to sections 17(b) and 6(c) of the Act to permit persons to 
effectuate in-kind purchases and redemptions with a Fund when they are 
affiliated persons of the Fund or second-tier affiliates solely by 
virtue of one or more of the following: (a) Holding 5% or more, or in 
excess of 25%, of the outstanding Shares of one or more Funds; (b) 
having an affiliation with a person with an ownership interest 
described in (a); or (c) holding 5% or more, or more than 25%, of the 
shares of one or more other registered investment companies (or series 
thereof) advised by the Adviser.
    19. Applicants assert that no useful purpose would be served by 
prohibiting these types of affiliated persons from acquiring or 
redeeming Creation Unit Aggregations through ``in-kind'' transactions. 
The deposit procedures for both in kind purchases and in-kind 
redemptions of Creation Unit Aggregations will be the same for all 
purchases and redemptions. Deposit Securities and Redemption Securities 
will be valued in the same manner as Portfolio Securities. Therefore, 
applicants state that in-kind purchases and redemptions will afford no 
opportunity for the specified affiliated persons, or second-tier 
affiliates, of a Fund to effect a transaction detrimental to other 
holders of Shares. Applicants also believe that in-kind purchases and 
redemptions will not result in self-dealing or overreaching of the 
Fund.
    20. Applicants also seek relief from section 17(a) to permit a Fund 
that is an affiliated person of an Acquiring Fund to sell its Shares to 
and redeem its Shares from an Acquiring Fund, and to engage in the 
accompanying in-kind transactions with the Acquiring Fund.\14\ 
Applicants state that the terms of the transactions are fair and 
reasonable and do not involve overreaching. Applicants note that any 
consideration paid by an

[[Page 22777]]

Acquiring Fund for the purchase or redemption of Shares directly from a 
Fund will be based on the NAV of the Fund.\15\ Applicants believe that 
any proposed transactions directly between the Funds and Acquiring 
Funds will be consistent with the policies of each Acquiring Fund. The 
purchase of Creation Unit Aggregations by an Acquiring Fund directly 
from a Fund will be accomplished in accordance with the investment 
restrictions of any such Acquiring Fund and will be consistent with the 
investment policies set forth in the Acquiring Fund's registration 
statement. The Acquiring Fund Agreement will require any Acquiring Fund 
that purchases Creation Unit Aggregations directly from a Fund to 
represent that the purchase of Creation Unit Aggregations from a Fund 
by an Acquiring Fund will be accomplished in compliance with the 
investment restrictions of the Acquiring Fund and will be consistent 
with the investment policies set forth in the Acquiring Fund's 
registration statement.
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    \14\ Applicants acknowledge that receipt of compensation by (a) 
an affiliated person of an Acquiring Fund, or an affiliated person 
of such person, for the purchase by the Acquiring Fund of Shares or 
(b) an affiliated person of a Fund, or an affiliated person of such 
person, for the sale by the Fund of its Shares to an Acquiring Fund 
may be prohibited by section 17(e)(1) of the Act. The Acquiring Fund 
Agreement also will include this acknowledgment.
    \15\ Applicants believe that an Acquiring Fund likely will 
purchase Shares of the Funds in the secondary market and will not 
purchase or redeem Creation Unit Aggregations directly from a Fund. 
However, the requested relief would apply to direct sales of Shares 
in Creation Unit Aggregations by a Fund to an Acquiring Fund and 
redemptions of those Shares. The requested relief is intended to 
cover the in-kind transactions that would accompany such sales and 
redemptions.
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Applicants' Conditions

    Applicants agree that any order of granting the requested relief 
will be subject to the following conditions: \16\
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    \16\ See note 4, supra.
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ETF Relief

    1. Each Fund's Prospectus will clearly disclose that, for purposes 
of the Act, Shares are issued by the Funds, and that the acquisition of 
Shares by investment companies is subject to the restrictions of 
section 12(d)(1) of the Act, except as permitted by an exemptive order 
that permits registered investment companies to invest in a Fund beyond 
the limits in section 12(d)(1), subject to certain terms and 
conditions, including that the registered investment company enter into 
an Acquiring Fund Agreement with the Fund regarding the terms of the 
investment.
    2. As long as the Trust operates in reliance on the requested 
order, the Shares will be listed on an Exchange.
    3. Neither the Trust nor any Fund will be advertised or marketed as 
an open end investment company or a mutual fund. Each Fund's Prospectus 
will prominently disclose that Shares are not individually redeemable 
shares and will disclose that the owners of Shares may acquire those 
Shares from a Fund and tender those Shares for redemption to a Fund 
only in Creation Unit Aggregations. Any advertising material that 
describes the purchase or sale of Creation Unit Aggregations or refers 
to redeemability will prominently disclose that Shares are not 
individually redeemable and that owners of Shares may acquire those 
Shares from a Fund and tender those Shares for redemption to a Fund in 
Creation Unit Aggregations only.
    4. The Web site for the Trust, which will be publicly accessible at 
no charge, will contain the following information, on a per individual 
Share basis, for the Fund: (a) The prior Business Day's NAV and the 
reported closing price, and a calculation of the premium or discount of 
such 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 life of the Fund, if 
shorter).
    5. The Prospectus and annual report for each Fund also will 
include: (a) The information listed in condition 4(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, as 
applicable; and (b) the following data, calculated on a per Share basis 
for one, five and ten year periods (or life of the Fund), (i) the 
cumulative total return and the average annual total return based on 
NAV and closing price, and (ii) the cumulative total return of the 
relevant Underlying Index.
    6. The requested relief to permit ETF operations will expire on the 
effective date of any Commission rule under the Act that provides 
relief permitting the operation of index-based exchange-traded funds.

Section 12(d)(1) Relief

    7. The members of an Acquiring Fund's Advisory Group will not 
control (individually or in the aggregate) a Fund within the meaning of 
section 2(a)(9) of the Act. The members of an Acquiring Fund's 
SubAdvisory Group will not control (individually or in the aggregate) a 
Fund within the meaning of section 2(a)(9) of the Act. If, as a result 
of a decrease in the outstanding voting securities of a Fund, the 
Acquiring Fund's Advisory Group or a Acquiring Fund's SubAdvisory 
Group, each in the aggregate, becomes a holder of more than 25% of the 
outstanding voting securities of a Fund, it will vote its Shares in the 
same proportion as the vote of all other holders of the Shares. This 
condition does not apply to the Acquiring Fund's SubAdvisory Group with 
respect to a Fund for which the Acquiring Fund SubAdviser or a person 
controlling, controlled by, or under common control with the Acquiring 
Fund SubAdviser acts as the investment adviser within the meaning of 
section 2(a)(20)(A) of the Act.
    8. No Acquiring Fund or Acquiring Fund Affiliate will cause any 
existing or potential investment by the Acquiring Fund in a Fund to 
influence the terms of any services or transactions between the 
Acquiring Fund or an Acquiring Fund Affiliate and the Fund or a Fund 
Affiliate.
    9. The board of directors or trustees of an Acquiring Management 
Company, including a majority of the disinterested directors or 
trustees, will adopt procedures reasonably designed to ensure that the 
Acquiring Fund Adviser and any Acquiring Fund SubAdviser are conducting 
the investment program of the Acquiring Management Company without 
taking into account any consideration received by the Acquiring 
Management Company or an Acquiring Fund Affiliate from a Fund or a Fund 
Affiliate in connection with any services or transactions.
    10. Once an investment by an Acquiring Fund in Shares exceeds the 
limit in section 12(d)(1)(A)(i) of the Act, the board of trustees of a 
Fund (``Board''), including a majority of the disinterested trustees, 
will determine that any consideration paid by the Fund to an Acquiring 
Fund or an Acquiring Fund Affiliate in connection with any services or 
transactions: (a) Is fair and reasonable in relation to the nature and 
quality of the services and benefits received by the Fund; (b) is 
within the range of consideration that the Fund would be required to 
pay to another unaffiliated entity in connection with the same services 
or transactions; and (c) does not involve overreaching on the part of 
any person concerned. This condition does not apply with respect to any 
services or transactions between a Fund and its investment adviser(s), 
or any person controlling, controlled by, or under common control with 
such investment adviser(s).
    11. No Acquiring Fund or Acquiring Fund Affiliate (except to the 
extent it is acting in its capacity as an investment adviser to a Fund) 
will cause the Fund to purchase a security in any Affiliated 
Underwriting.
    12. The Board, including a majority of the disinterested trustees, 
will adopt procedures reasonably designed to monitor any purchases of 
securities by

[[Page 22778]]

a Fund in an Affiliated Underwriting, once an investment by an 
Acquiring Fund in the securities of the Fund exceeds the limit of 
section 12(d)(1)(A)(i) of the Act, including any purchases made 
directly from an Underwriting Affiliate. The Board will review these 
purchases periodically, but no less frequently than annually, to 
determine whether the purchases were influenced by the investment by 
the Acquiring Fund in the Fund. The Board will consider, among other 
things: (a) Whether the purchases were consistent with the investment 
objectives and policies of the Fund; (b) how the performance of 
securities purchased in an Affiliated Underwriting compares to the 
performance of comparable securities purchased during a comparable 
period of time in underwritings other than Affiliated Underwritings or 
to a benchmark such as a comparable market index; and (c) whether the 
amount of securities purchased by a Fund in Affiliated Underwritings 
and the amount purchased directly from an Underwriting Affiliate have 
changed significantly from prior years. The Board will take any 
appropriate actions based on its review, including, if appropriate, the 
institution of procedures designed to assure that purchases of 
securities in Affiliated Underwritings are in the best interest of 
shareholders of the Fund.
    13. Each Fund will maintain and preserve permanently in an easily 
accessible place a written copy of the procedures described in the 
preceding condition, and any modifications to such procedures, and will 
maintain and preserve for a period of not less than six years from the 
end of the fiscal year in which any purchase in an Affiliated 
Underwriting occurred, the first two years in an easily accessible 
place, a written record of each purchase of securities in Affiliated 
Underwritings, once an investment by an Acquiring Fund in the 
securities of the Fund exceeds the limit of section 12(d)(1)(A)(i) of 
the Act, setting forth from whom the securities were acquired, the 
identity of the underwriting syndicate's members, the terms of the 
purchase, and the information or materials upon which the Board's 
determinations were made.
    14. Before investing in the Shares of a Fund in excess of the 
limits in section 12(d)(1)(A), each Acquiring Fund and the Fund will 
execute a Acquiring Fund Agreement stating, without limitation, that 
their boards of directors or trustees and their investment adviser(s) 
or their Sponsors or Trustees, as applicable, understand the terms and 
conditions of the order, and agree to fulfill their responsibilities 
under the order. At the time of its investment in Shares, in excess of 
the limit in section 12(d)(1)(A)(i), a Acquiring Fund will notify the 
Fund of the investment. At such time, the Acquiring Fund will also 
transmit to the Fund a list of names of each Acquiring Fund Affiliate 
and Underwriting Affiliate. The Acquiring Fund will notify the Fund of 
any changes to the list of names as soon as reasonably practicable 
after a change occurs. The Fund and the Acquiring Fund will maintain 
and preserve a copy of the order, the Acquiring Fund Agreement, and the 
list with any updated information for the duration of the investment 
and for a period of not less than six years thereafter, the first two 
years in an easily accessible place.
    15. The Acquiring Fund Adviser, Trustee or Sponsor, as applicable, 
will waive fees otherwise payable to it by the Acquiring Fund in an 
amount at least equal to any compensation (including fees received 
under any plan adopted by a Fund under rule 12b-1 under the Act) 
received from a Fund by the Acquiring Fund Adviser, Trustee or Sponsor, 
or an affiliated person of the Acquiring Fund Adviser, Trustee or 
Sponsor, other than any advisory fees paid to the Acquiring Fund 
Adviser, Trustee or Sponsor, or its affiliated person by a Fund, in 
connection with the investment by the Acquiring Fund in the Fund. Any 
Acquiring Fund SubAdviser will waive fees otherwise payable to the 
Acquiring Fund SubAdviser, directly or indirectly, by the Acquiring 
Management Company in an amount at least equal to any compensation 
received from the Fund by the Acquiring Fund SubAdviser, or an 
affiliated person of the Acquiring Fund Sub-Adviser, other than any 
advisory fees paid to the Acquiring Fund Sub-Adviser or its affiliated 
person by the Fund, in connection with any investment by the Acquiring 
Management Company in the Fund made at the direction of the Acquiring 
Fund SubAdviser. In the event that the Acquiring Fund SubAdviser waives 
fees, the benefit of the waiver will be passed through to the Acquiring 
Management Company.
    16. Any sales charges and/or service fees charged with respect to 
shares of an Acquiring Fund will not exceed the limits applicable to a 
fund of funds as set forth in NASD Conduct Rule 2830.
    17. No Fund will acquire securities of any other investment company 
or company relying on section 3(c)(1) or 3(c)(7) of the Act in excess 
of the limits contained in section 12(d)(1)(A) of the Act, except to 
the extent permitted by exemptive relief from the Commission permitting 
the Fund to purchase shares of other investment companies for short-
term cash management purposes.
    18. Before approving any advisory contract under section 15 of the 
Act, the board of directors or trustees of each Acquiring Management 
Company, including a majority of the disinterested directors or 
trustees, will find that the advisory fees charged under such advisory 
contract are based on services provided that will be in addition to, 
rather than duplicative of, the services provided under the advisory 
contract(s) of any Fund in which the Acquiring Management Company may 
invest. These findings and their basis will be recorded fully in the 
minute books of the appropriate Acquiring Management Company.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-11301 Filed 5-13-09; 8:45 am]
BILLING CODE P