Arrow Investment Advisers, LLC, and Arrow Funds Trust; Notice of Application, 45261-45267 [E9-20983]
Download as PDF
<![CDATA[
Federal Register / Vol. 74, No. 168 / Tuesday, September 1, 2009 / Notices
dealer will spend, on average,
approximately 20 hours complying with
the notice requirement of the rule, for a
total of 6,400 hours. Each broker-dealer
will also spend 1 hour complying with
the annual explanation of the right to
revoke requirement, for a total of 320
hours. Therefore, the total number of
respondents for rule 154 is 470 (150
mutual funds plus 320 broker-dealers),
and the estimated total hour burden is
9,870 hours (3,150 hours for mutual
funds plus 6,720 hours for brokerdealers).
The estimate of average burden hours
is made solely for the purposes of the
Paperwork Reduction Act, and is not
derived from a comprehensive or even
a representative survey or study of the
costs of Commission rules and forms.
Written comments are invited on: (a)
Whether the collections of information
are necessary for the proper
performance of the functions of the
Commission, including whether the
information has practical utility; (b) the
accuracy of the Commission’s estimate
of the burden of the collections of
information; (c) ways to enhance the
quality, utility, and clarity of the
information collected; and (d) ways to
minimize the burden of the collections
of information on respondents,
including through the use of automated
collection techniques or other forms of
information technology. Consideration
will be given to comments and
suggestions submitted in writing within
60 days of this publication.
Please direct your written comments
to Charles Boucher, Director/Chief
Information Officer, Securities and
Exchange Commission, C/O Shirley
Martinson, 6432 General Green Way,
Alexandria, VA, 22312; or send an email to: PRA_Mailbox@sec.gov.
Dated: August 26, 2009.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–21004 Filed 8–31–09; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
mstockstill on DSKH9S0YB1PROD with NOTICES
[Investment Company Act Release No.
28852; 812–13405]
Arrow Investment Advisers, LLC, and
Arrow Funds Trust; Notice of
Application
August 25, 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
VerDate Nov<24>2008
17:18 Aug 31, 2009
Jkt 217001
‘‘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.
SUMMARY: Summary of Application:
Applicants request an order that would
permit (a) certain open-end management
investment companies and their series
to issue shares (‘‘Shares’’) redeemable in
large aggregations (‘‘Creation Unit
Aggregations’’) only; (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: Arrow Investment
Advisers, LLC (‘‘Adviser’’) and Arrow
Funds Trust (‘‘Trust’’).
45261
FOR FURTHER INFORMATION CONTACT:
Emerson S. Davis, Sr., Senior Counsel at
(202) 551–6868, or Julia K. Gilmer,
Branch Chief, at (202) 551–6821
(Division of Investment Management,
Office of Investment Company
Regulation).
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. The complete application
may be obtained via the Commission’s
Web site by searching for the file
number, or an applicant using the
Company name box, at https://
www.sec.gov/search/search.htm or by
calling (202) 551–8090.
Applicants’ Representations
1. The Trust is registered under the
Act as an open-end management
investment company and is organized as
a Delaware statutory trust. The Trust
will initially offer three series (‘‘Initial
Funds’’), each of which will track a
global index of equity and fixed income
securities. Applicants request that the
order (‘‘Order’’) apply to the Initial
Funds and any existing or future
registered open-end management
investment company and its series
registered under the Act (collectively,
with future series of the Trust, the
‘‘Future Funds,’’ and together with the
Initial Funds, the ‘‘Funds’’).1 Each
Future Fund will be (a) advised by the
Adviser or an entity controlling,
controlled by, or under common control
DATES: Filing Dates: The application was
with the Adviser, and (b) comply with
filed on July 9, 2007 and amended on
the terms and conditions stated in the
November 3, 2008, May 28, 2009, and
application.
August 21, 2009.
2. The Adviser is registered as an
Hearing or Notification of Hearing: An investment adviser under the
order granting the application will be
Investment Advisers Act of 1940, as
issued unless the Commission orders a
amended (the ‘‘Advisers Act’’) and will
hearing. Interested persons may request be the investment adviser to the Initial
a hearing by writing to the
Funds. The Adviser may enter into subCommission’s Secretary and serving
advisory agreements with other
applicants with a copy of the request,
investment advisers to act as
personally or by mail. Hearing requests
subadvisers to the Funds
should be received by the Commission
(‘‘Subadvisers’’). Each Subadviser will
by 5:30 p.m. on September 21, 2009,
be registered under the Advisers Act. A
and should be accompanied by proof of
broker-dealer registered under the
service on applicants, in the form of an
Securities Exchange Act of 1934 (the
affidavit, or for lawyers, a certificate of
‘‘Exchange Act’’), will serve as the
service. Hearing requests should state
principal underwriter and distributor
the nature of the writer’s interest, the
for the Creation Unit Aggregations of
reason for the request, and the issues
Shares (‘‘Distributor’’).
contested. Persons who wish to be
3. Each Fund will consist of a
notified of a hearing may request
portfolio of securities (‘‘Portfolio
notification by writing to the
Securities’’) selected to correspond
Commission’s Secretary.
generally to the price and yield
performance, before fees and expenses,
ADDRESSES: Secretary, Securities and
of a specified securities index
Exchange Commission, 100 F Street,
NE., Washington, DC 20549–1090;
1 All entities that currently intend to rely on the
Applicants, c/o Joe Barrato, Chief
Order are named as applicants. An Acquiring Fund
Executive Officer, Arrow Investment
(as defined below) may rely on the Order only to
Advisers, LLC, 2943 Olney-Sandy
invest in Funds and not in any other registered
Spring Road, Suite A, Olney, MD 20832. investment company.
PO 00000
Frm 00103
Fmt 4703
Sfmt 4703
E:\FR\FM\01SEN1.SGM
01SEN1
45262
Federal Register / Vol. 74, No. 168 / Tuesday, September 1, 2009 / Notices
mstockstill on DSKH9S0YB1PROD with NOTICES
(‘‘Underlying Index’’).2 Any entity that
creates, compiles, sponsors or maintains
an Underlying Index (‘‘Index Provider’’)
is not or will not 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 a Distributor.
4. The investment objective of each
Fund will be to provide investment
results, before fees and expenses, that
correspond generally to the price and
yield performance, of its Underlying
Index.3 The values of the Underlying
Indices will be disseminated every 15
seconds each ‘‘Business Day,’’ which is
defined as any day that a Fund is
required to be opened under section
22(e) of the Act. 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 proportions as
in the Underlying Index.5 A Fund may
use a representative sampling strategy
pursuant to which it will invest in a
significant number but not all of the
Component Securities of its Underlying
Index. This may be the case when there
are practical difficulties or substantial
costs involved in compiling an entire
Underlying Index or when a Component
Security is illiquid. Applicants
anticipate that a Fund that utilizes a
representative sampling strategy will
not track the performance of its
Underlying Index with the same degree
2 The Underlying Indexes for the Initial Funds are
the Dow Jones Global Relative Risk Moderate
Portfolio Index, Dow Jones Relative Risk
Moderately Aggressive Portfolio Index and the Dow
Jones Global Risk Aggressive Portfolio Index.
3 Applicants represent that each Fund will invest
at least 90% or 80% of its total assets in the
component securities that comprise its Underlying
Index (‘‘Component Securities’’) and the depositary
receipts representing such securities. ‘‘Depositary
Receipts’’ will typically be American Depositary
Receipts, but may include Global Depositary
Receipts and Euro Depositary Receipts. Each Fund
also may invest up to 10% or 20%, as the case may
be, of its total assets in futures contracts, options
on future contracts, options and swaps, as well as
cash and cash equivalents and other investment
companies.
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 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 fundamental investment characteristics and
liquidity measures perform like those of the
Underlying Index.
VerDate Nov<24>2008
17:18 Aug 31, 2009
Jkt 217001
of accuracy as a Fund employing the
replication strategy. Applicants expect
that each Fund will have a tracking
error relative to the performance of its
Underlying Index of less than 5 percent.
5. Shares will be sold at a price
between $25 and $250 in Creation Unit
Aggregations which will have an initial
price 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 either:
(a) A broker-dealer or other participant
in the continuous net settlement system
of the National Securities Clearing
Corporation, a clearing agency
registered with the Commission, or (b)
a participant in the Depository Trust
Company (‘‘DCrdquo;, and such
participant, ‘‘DCParticipant’’). Shares
generally will be sold in Creation Unit
Aggregations in exchange for an in-kind
deposit by the purchaser of a portfolio
of specified securities (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 generally 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 reserves
the right to permit, under certain
circumstances, a purchaser of Creation
Unit Aggregations to substitute cash in
lieu of depositing some or all of the
requisite Deposit Securities.
6. 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
6 The Trust will sell Creation Unit Aggregations
of each Fund only on a Business Day. Each
Business Day, prior to the opening of trading on the
Primary Listing Exchange, the list of names and
amount of each security constituting the current
Deposit Securities and the Cash Amount, effective
as of the previous Business Day, will be made
available. Any national securities exchange (as
defined in section 2(a)(26) of the Act) (‘‘Exchange’’)
on which Shares are listed (‘‘Primary Listing
Exchange’’) will disseminate, every 15 seconds
during its regular trading hours, through the
facilities of the Consolidated Tape Association, an
estimated intra-day NAV of Shares (which will
include the previous day’s Cash Amount).
PO 00000
Frm 00104
Fmt 4703
Sfmt 4703
Aggregations.7 The exact amounts of
Transaction Fees relevant to each Fund
(including the maximum Transaction
Fees) will be fully disclosed in the
Prospectus of such Fund. The method
for calculating the Transaction Fees will
be disclosed in each Fund’s statement of
additional information (‘‘SAI’’). The
Distributor will furnish a Fund’s
Prospectus and a confirmation to those
placing purchase orders and maintain a
record of the purchase orders,
confirmations of purchase orders and
the instructions given to the Fund to
implement the delivery of Shares.
7. Purchasers of Shares in Creation
Unit Aggregations may hold such Shares
or 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 Primary
Listing Exchange will be designated to
act as a specialist or market maker and
maintain a market for Shares trading on
such Exchange. Prices of Shares trading
on an Exchange will be based on the
current bid/offer market. Shares sold in
the secondary market will be subject to
customary brokerage commissions and
charges.
8. Applicants expect that Purchasers
of Creation Unit Aggregations will
include institutional investors and
arbitrageurs. A specialist or market
maker also may purchase Creation Unit
Aggregations of Shares for use in its
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 ability to continually
purchase Creation Unit Aggregations at
NAV, which should ensure that Shares
do not trade at a material discount or
premium to NAV.
9. Shares will not be individually
redeemable, and owners of Shares may
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
7 Where a Fund permits a purchaser to substitute
cash in lieu of depositing one or more Deposit
Securities, the purchaser may be assessed a higher
Transaction Fee to cover the cost to the Fund of
Acquiring such Deposit Securities.
8 Shares will be registered in book-entry form
only. DCor its nominee will be the registered owner
of all outstanding Shares. DCor DCParticipants will
maintain records reflecting beneficial owners of
Shares.
E:\FR\FM\01SEN1.SGM
01SEN1
Federal Register / Vol. 74, No. 168 / Tuesday, September 1, 2009 / Notices
Aggregation generally will receive (a)
Portfolio Securities designated to be
delivered for Creation Unit Aggregation
redemptions (‘‘Redemption Securities’’)
on the date that the request for
redemption is submitted and (b) the
Cash Amount.9 An investor may receive
the cash equivalent of a Fund Security
in certain circumstances.
10. Neither the Trust nor any
individual Fund will be marketed or
otherwise held out an ‘‘open-end
investment company’’ or a ‘‘mutual
fund.’’ Instead, each Fund will be
marketed as an ‘‘exchange traded fund,’’
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 Trust or each Fund, as
applicable, will provide copies of their
annual and semi-annual shareholder
reports to DCParticipants for
distribution to shareholders.
mstockstill on DSKH9S0YB1PROD with NOTICES
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 and 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 (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
9 As a general matter, the Deposit Securities and
Redemption Securities will correspond pro rata to
the Portfolio Securities held by each Fund although
in limited circumstances Deposit Securities and
Redemption Securities may not be the same on the
same day. 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 of
1933 (‘‘Securities Act’’), the 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.
VerDate Nov<24>2008
17:18 Aug 31, 2009
Jkt 217001
45263
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 Trust or a Fund to register as
an open-end management investment
company and issue Shares that are
redeemable in Creation Unit
Aggregations only. Applicants state that
investors may purchase Shares in
Creation Unit Aggregations from each
Fund. Applicants further state that
because the market price of Shares will
be disciplined by arbitrage
opportunities, the market price of an
individual Fund Share will not vary
much from its NAV.
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
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) ensure an orderly distribution of
investment company shares by
eliminating price competition from
dealers offering 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 thwarted by
permitting Shares to trade in the
secondary market at negotiated prices.
Applicants state that (a) secondary
market trading in Shares does not
directly involve Fund assets 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(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
reacquiring 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
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
Funds that are based on global equity
indices, global fixed income indices or
global indices of equity and fixed
income securities (collectively, ‘‘Global
Funds’’) and Funds that are based on
international equity indices,
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.
PO 00000
Frm 00105
Fmt 4703
Sfmt 4703
E:\FR\FM\01SEN1.SGM
01SEN1
45264
Federal Register / Vol. 74, No. 168 / Tuesday, September 1, 2009 / Notices
mstockstill on DSKH9S0YB1PROD with NOTICES
international fixed income indices or a
blend of international, equity and fixed
income indices (collectively,
‘‘International Funds’’) is contingent not
only on the settlement cycle of the
United States securities markets, but
also on the delivery cycles present in
foreign markets in which Global Funds
and International Funds invest.
Applicants state that delivery cycles for
transferring Portfolio Securities to
redeeming investors coupled with local
market holiday schedules will, under
certain circumstances, require a delivery
process longer than seven calendar
days. Applicants request relief under
section 6(c) of the Act from section 22(e)
to permit the Global Funds and
International Funds 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 Fund’s
Prospectus and/or SAI, applicants
expect that each Global Fund and
International Fund will be able to
deliver redemption proceeds within
seven days.10 With respect to future
Global Funds and International Funds,
applicants seek the same relief from
section 22(e) only to the extent that
circumstances similar to those described
in the application exist.
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 Prospectus
and/or SAI will disclose those instances
in a given year where, due to local
holidays, more than seven days will be
needed to deliver redemption proceeds.
Applicants are not seeking relief from
section 22(e) with respect to Global
Funds and International 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
10 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.
VerDate Nov<24>2008
17:18 Aug 31, 2009
Jkt 217001
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 advised or
sponsored 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). No
Acquiring Fund will be in the same
group of investment companies as the
Funds. In addition, applicants seek
relief to permit a Fund or a brokerdealer registered under the Exchange
Act to sell Shares to an Acquiring Fund
in excess of the limits of section
12(d)(1)(B).
11. All Acquiring Management
Companies 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 an
‘‘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
PO 00000
Frm 00106
Fmt 4703
Sfmt 4703
influence over the Funds.11 To limit the
control that an 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 an Acquiring
Fund Adviser or Sponsor, and any
investment company and any issuer that
would be an investment company but
for sections 3(c)(1) or 3(c)(7) of the Act
that is advised or sponsored by an
Acquiring Fund Adviser or Sponsor, or
any person controlling, controlled by, or
under common control with an
Acquiring Fund Adviser or Sponsor
(‘‘Acquiring Fund 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
company or issuer that would be an
investment company but for sections
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 any offering of securities
during the existence of any
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,
employee or Sponsor of an Acquiring
Fund, or a person of which any such
officer, director, member of an advisory
board, Acquiring Fund Adviser,
Acquiring Fund Subadviser, employee,
or Sponsor is an affiliated person
11 An ‘‘Acquiring Fund Affiliate’’ is an Acquiring
Fund Adviser, Acquiring Fund Subadviser,
Sponsor, promoter, and 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 a Fund and any person controlling,
controlled by or under common control with any
of these entities.
E:\FR\FM\01SEN1.SGM
01SEN1
mstockstill on DSKH9S0YB1PROD with NOTICES
Federal Register / Vol. 74, No. 168 / Tuesday, September 1, 2009 / Notices
(except that any person whose
relationship to the Fund is covered by
section 10(f) of the Act is not an
Underwriting Affiliate.
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
directors or trustees who are not
‘‘interested persons’’ within the
meaning of section 2(a)(19) of the Act
(‘‘independent 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
or 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 an
Acquiring Fund will not exceed the
limits applicable to a fund of funds set
forth in Conduct Rule 2830 of the
National Association of Securities
Dealers (‘‘NASD’’).12
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. 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 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
12 Any references to Conduct Rule 2830 of the
NASD include any successor or replacement rule to
Conduct Rule 2830 that may be adopted by the
Financial Industry Regulatory Authority.
VerDate Nov<24>2008
17:18 Aug 31, 2009
Jkt 217001
include an acknowledgement from the
Acquiring Fund that it may rely on the
Order only to invest in the 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 an 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
PO 00000
Frm 00107
Fmt 4703
Sfmt 4703
45265
Aggregations will be the same for all
purchases and redemptions. Deposit
Securities and Fund 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
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 through
in-kind Creation Unit Aggregation
transactions with the Acquiring Fund.13
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
Acquiring Fund for the purchase or
redemption of Shares directly from a
Fund will be based on the NAV of the
Fund.14 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.
13 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.
14 Applicants believe that an Acquiring Fund will
purchase Shares 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 Creation Unit
Aggregations by a Fund to an Acquiring Fund and
redemptions of those Shares.
E:\FR\FM\01SEN1.SGM
01SEN1
45266
Federal Register / Vol. 74, No. 168 / Tuesday, September 1, 2009 / Notices
Applicants’ Conditions
Applicants agree that any order of
granting the requested relief will be
subject to the following conditions:15
mstockstill on DSKH9S0YB1PROD with NOTICES
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 or a Fund
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 openend 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 each Fund, 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 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 the 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
15 See
note 4, supra.
VerDate Nov<24>2008
17:18 Aug 31, 2009
Jkt 217001
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 exchangetraded funds.
Section 12(d)(1) Relief
7. The members of the 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 the Acquiring
Fund’s Subadvisory Group, each in the
aggregate, becomes a holder of more
than 25 percent 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 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 Acquiring Fund
Affiliate and the Fund or a Fund
Affiliate.
9. The board of directors or trustees of
an Acquiring Management Company,
including the independent directors or
trustees, will adopt procedures
reasonably designed to ensure that the
Acquiring Fund Adviser and 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.
PO 00000
Frm 00108
Fmt 4703
Sfmt 4703
10. Once an investment by an
Acquiring Fund in Shares exceeds the
limits in section 12(d)(1)(A)(i) of the
Act, the board of directors or trustees of
a Fund (‘‘Board’’), including a majority
of the independent directors or 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 a Fund to
purchase a security in any Affiliated
Underwriting.
12. The Board, including a majority of
the independent directors or trustees,
will adopt procedures reasonably
designed to monitor any purchases of
securities by the 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 the 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
E:\FR\FM\01SEN1.SGM
01SEN1
mstockstill on DSKH9S0YB1PROD with NOTICES
Federal Register / Vol. 74, No. 168 / Tuesday, September 1, 2009 / Notices
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 determinations of the Board were
made.
14. Before investing in Shares in
excess of the limits in section
12(d)(1)(A), each Acquiring Fund and
the Fund will execute an 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), an Acquiring Fund will
notify the Fund of the investment. At
such time, the Acquiring Fund will also
transmit to the Fund a list of the 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 pursuant to any plan
adopted under rule 12b-1 under the Act)
received from the Fund by the
Acquiring Fund Adviser, Trustee or
Sponsor, or an affiliated person of the
Acquiring Fund Adviser, Trustee or
VerDate Nov<24>2008
17:18 Aug 31, 2009
Jkt 217001
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 a Fund by
the Acquiring Fund Subadviser, or an
affiliated person of the Acquiring Fund
Subadviser, other than any advisory fees
paid to the Acquiring Fund Subadviser
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 Conduct Rule 2830 of the
NASD.
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.
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 Fund.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–20983 Filed 8–31–09; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meeting
Notice is hereby given, pursuant to
the provisions of the Government in the
PO 00000
Frm 00109
Fmt 4703
Sfmt 4703
45267
Sunshine Act, Public Law 94–409, that
the Securities and Exchange
Commission will hold a Closed Meeting
on Thursday, September 3, 2009 at 2
p.m.
Commissioners, Counsel to the
Commissioners, the Secretary to the
Commission, and recording secretaries
will attend the Closed Meeting. Certain
staff members who have an interest in
the matters also may be present.
The General Counsel of the
Commission, or his designee, has
certified that, in his opinion, one or
more of the exemptions set forth in 5
U.S.C. 552b(c)(3), (5), (7), 9(B) and (10)
and 17 CFR 200.402(a)(3), (5), (7), 9(ii)
and (10), permit consideration of the
scheduled matters at the Closed
Meeting.
Commissioner Walter, as duty officer,
voted to consider the items listed for the
Closed Meeting in a closed session.
The subject matter of the Closed
Meeting scheduled for Thursday,
September 3, 2009 will be: Institution
and settlement of injunctive actions;
institution and settlement of
administrative proceedings; and other
matters relating to enforcement
proceedings.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting items.
For further information and to
ascertain what, if any, matters have been
added, deleted or postponed, please
contact: The Office of the Secretary at
(202) 551–5400.
Dated: August 27, 2009.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9–21166 Filed 8–28–09; 4:15 pm]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[File No. 500–1]
Brooke Corporation; Order of
Suspension of Trading
August 28, 2009.
It appears to the Securities and
Exchange Commission that there is a
lack of current and accurate information
concerning the securities of Brooke
Corporation because it has not filed any
periodic reports with the Commission
since the period ended June 30, 2008.
The Commission is of the opinion that
the public interest and the protection of
investors require a suspension of trading
in the securities of the above-listed
company.
Therefore, it is ordered, pursuant to
Section 12(k) of the Securities Exchange
E:\FR\FM\01SEN1.SGM
01SEN1
]]>Agencies
[Federal Register Volume 74, Number 168 (Tuesday, September 1, 2009)]
[Notices]
[Pages 45261-45267]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-20983]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 28852; 812-13405]
Arrow Investment Advisers, LLC, and Arrow Funds Trust; Notice of
Application
August 25, 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 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.
-----------------------------------------------------------------------
SUMMARY: Summary of Application: Applicants request an order that would
permit (a) certain open-end management investment companies and their
series to issue shares (``Shares'') redeemable in large aggregations
(``Creation Unit Aggregations'') only; (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: Arrow Investment Advisers, LLC (``Adviser'') and Arrow
Funds Trust (``Trust'').
DATES: Filing Dates: The application was filed on July 9, 2007 and
amended on November 3, 2008, May 28, 2009, and August 21, 2009.
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 September 21, 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, c/o Joe Barrato, Chief
Executive Officer, Arrow Investment Advisers, LLC, 2943 Olney-Sandy
Spring Road, Suite A, Olney, MD 20832.
FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Sr., Senior Counsel
at (202) 551-6868, or Julia K. Gilmer, Branch Chief, at (202) 551-6821
(Division of Investment Management, Office of Investment Company
Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or an applicant
using the Company name box, at https://www.sec.gov/search/search.htm or
by calling (202) 551-8090.
Applicants' Representations
1. The Trust is registered under the Act as an open-end management
investment company and is organized as a Delaware statutory trust. The
Trust will initially offer three series (``Initial Funds''), each of
which will track a global index of equity and fixed income securities.
Applicants request that the order (``Order'') apply to the Initial
Funds and any existing or future registered open-end management
investment company and its series registered under the Act
(collectively, with future series of the Trust, the ``Future Funds,''
and together with the Initial Funds, the ``Funds'').\1\ Each 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 stated in the application.
---------------------------------------------------------------------------
\1\ All entities that currently intend to rely on the Order are
named as applicants. An Acquiring Fund (as defined below) may rely
on the Order only to invest in Funds and not in any other registered
investment company.
---------------------------------------------------------------------------
2. 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 Initial Funds. The Adviser may
enter into sub-advisory agreements with other investment advisers to
act as subadvisers to the Funds (``Subadvisers''). Each Subadviser will
be registered under the Advisers Act. A broker-dealer registered under
the Securities Exchange Act of 1934 (the ``Exchange Act''), will serve
as the principal underwriter and distributor for the Creation Unit
Aggregations of Shares (``Distributor'').
3. Each Fund will consist of a portfolio of securities (``Portfolio
Securities'') selected to correspond generally to the price and yield
performance, before fees and expenses, of a specified securities index
[[Page 45262]]
(``Underlying Index'').\2\ Any entity that creates, compiles, sponsors
or maintains an Underlying Index (``Index Provider'') is not or will
not 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 a Distributor.
---------------------------------------------------------------------------
\2\ The Underlying Indexes for the Initial Funds are the Dow
Jones Global Relative Risk Moderate Portfolio Index, Dow Jones
Relative Risk Moderately Aggressive Portfolio Index and the Dow
Jones Global Risk Aggressive Portfolio Index.
---------------------------------------------------------------------------
4. The investment objective of each Fund will be to provide
investment results, before fees and expenses, that correspond generally
to the price and yield performance, of its Underlying Index.\3\ The
values of the Underlying Indices will be disseminated every 15 seconds
each ``Business Day,'' which is defined as any day that a Fund is
required to be opened under section 22(e) of the Act. 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 proportions as in the
Underlying Index.\5\ A Fund may use a representative sampling strategy
pursuant to which it will invest in a significant number but not all of
the Component Securities of its Underlying Index. This may be the case
when there are practical difficulties or substantial costs involved in
compiling an entire Underlying Index or when a Component Security is
illiquid. Applicants anticipate that a Fund that utilizes a
representative sampling strategy will not track the performance of its
Underlying Index with the same degree of accuracy as a Fund employing
the replication strategy. Applicants expect that each Fund will have a
tracking error relative to the performance of its Underlying Index of
less than 5 percent.
---------------------------------------------------------------------------
\3\ Applicants represent that each Fund will invest at least 90%
or 80% of its total assets in the component securities that comprise
its Underlying Index (``Component Securities'') and the depositary
receipts representing such securities. ``Depositary Receipts'' will
typically be American Depositary Receipts, but may include Global
Depositary Receipts and Euro Depositary Receipts. Each Fund also may
invest up to 10% or 20%, as the case may be, of its total assets in
futures contracts, options on future contracts, options and swaps,
as well as cash and cash equivalents and other investment companies.
\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
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 fundamental
investment characteristics and liquidity measures perform like those
of the Underlying Index.
---------------------------------------------------------------------------
5. Shares will be sold at a price between $25 and $250 in Creation
Unit Aggregations which will have an initial price 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 either: (a) A broker-dealer or
other participant in the continuous net settlement system of the
National Securities Clearing Corporation, a clearing agency registered
with the Commission, or (b) a participant in the Depository Trust
Company (``DCrdquo;, and such participant, ``DCParticipant''). Shares
generally will be sold in Creation Unit Aggregations in exchange for an
in-kind deposit by the purchaser of a portfolio of specified securities
(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 generally 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 reserves the right to permit, under certain
circumstances, a purchaser of Creation Unit Aggregations to substitute
cash in lieu of depositing some or all of the requisite Deposit
Securities.
---------------------------------------------------------------------------
\6\ The Trust will sell Creation Unit Aggregations of each Fund
only on a Business Day. Each Business Day, prior to the opening of
trading on the Primary Listing Exchange, the list of names and
amount of each security constituting the current Deposit Securities
and the Cash Amount, effective as of the previous Business Day, will
be made available. Any national securities exchange (as defined in
section 2(a)(26) of the Act) (``Exchange'') on which Shares are
listed (``Primary Listing Exchange'') will disseminate, every 15
seconds during its regular trading hours, through the facilities of
the Consolidated Tape Association, an estimated intra-day NAV of
Shares (which will include the previous day's Cash Amount).
---------------------------------------------------------------------------
6. 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 exact amounts of Transaction Fees relevant to each
Fund (including the maximum Transaction Fees) will be fully disclosed
in the Prospectus of such Fund. The method for calculating the
Transaction Fees will be disclosed in each Fund's statement of
additional information (``SAI''). The Distributor will furnish a Fund's
Prospectus and a confirmation to those placing purchase orders and
maintain a record of the purchase orders, confirmations of purchase
orders and the instructions given to the Fund to implement the delivery
of Shares.
---------------------------------------------------------------------------
\7\ Where a Fund permits a purchaser to substitute cash in lieu
of depositing one or more Deposit Securities, the purchaser may be
assessed a higher Transaction Fee to cover the cost to the Fund of
Acquiring such Deposit Securities.
---------------------------------------------------------------------------
7. Purchasers of Shares in Creation Unit Aggregations may hold such
Shares or 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 Primary Listing Exchange will be designated to act as
a specialist or market maker and maintain a market for Shares trading
on such Exchange. Prices of Shares trading on an Exchange will be based
on the current bid/offer market. Shares sold in the secondary market
will be subject to customary brokerage commissions and charges.
8. Applicants expect that Purchasers of Creation Unit Aggregations
will include institutional investors and arbitrageurs. A specialist or
market maker also may purchase Creation Unit Aggregations of Shares for
use in its 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 ability to continually purchase Creation Unit Aggregations at NAV,
which should ensure that Shares do not trade at a material discount or
premium to NAV.
---------------------------------------------------------------------------
\8\ Shares will be registered in book-entry form only. DCor its
nominee will be the registered owner of all outstanding Shares. DCor
DCParticipants will maintain records reflecting beneficial owners of
Shares.
---------------------------------------------------------------------------
9. Shares will not be individually redeemable, and owners of Shares
may 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
[[Page 45263]]
Aggregation generally will receive (a) Portfolio Securities designated
to be delivered for Creation Unit Aggregation redemptions (``Redemption
Securities'') on the date that the request for redemption is submitted
and (b) the Cash Amount.\9\ An investor may receive the cash equivalent
of a Fund Security in certain circumstances.
---------------------------------------------------------------------------
\9\ As a general matter, the Deposit Securities and Redemption
Securities will correspond pro rata to the Portfolio Securities held
by each Fund although in limited circumstances Deposit Securities
and Redemption Securities may not be the same on the same day. 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 of 1933
(``Securities Act''), the 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.
---------------------------------------------------------------------------
10. Neither the Trust nor any individual Fund will be marketed or
otherwise held out an ``open-end investment company'' or a ``mutual
fund.'' Instead, each Fund will be marketed as an ``exchange traded
fund,'' 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 Trust or each Fund, as
applicable, will provide copies of their annual and semi-annual
shareholder reports to DCParticipants 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 and 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 (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 Trust or a Fund to
register as an open-end management investment company and issue Shares
that are redeemable in Creation Unit Aggregations only. Applicants
state that investors may purchase Shares in Creation Unit Aggregations
from each Fund. Applicants further state that because the market price
of Shares will be disciplined by arbitrage opportunities, the market
price of an individual Fund Share will not vary much from its 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 reacquiring
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 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 who could pay
investors a little 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 directly involve Fund assets 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 Funds that are based on global
equity indices, global fixed income indices or global indices of equity
and fixed income securities (collectively, ``Global Funds'') and Funds
that are based on international equity indices,
[[Page 45264]]
international fixed income indices or a blend of international, equity
and fixed income indices (collectively, ``International Funds'') is
contingent not only on the settlement cycle of the United States
securities markets, but also on the delivery cycles present in foreign
markets in which Global Funds and International Funds invest.
Applicants state that delivery cycles for transferring Portfolio
Securities to redeeming investors coupled with local market holiday
schedules will, under certain circumstances, require a delivery process
longer than seven calendar days. Applicants request relief under
section 6(c) of the Act from section 22(e) to permit the Global Funds
and International Funds 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 Fund's Prospectus and/or SAI,
applicants expect that each Global Fund and International Fund will be
able to deliver redemption proceeds within seven days.\10\ With respect
to future Global Funds and International Funds, applicants seek the
same relief from section 22(e) only to the extent that circumstances
similar to those described in the application exist.
---------------------------------------------------------------------------
\10\ 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.
---------------------------------------------------------------------------
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 Prospectus and/or SAI will disclose those
instances in a given year where, due to local holidays, more than seven
days will be needed to deliver redemption proceeds. Applicants are not
seeking relief from section 22(e) with respect to Global Funds and
International 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
advised or sponsored 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). No Acquiring Fund will be in the same group of
investment companies as the Funds. In addition, applicants seek relief
to permit a Fund or a broker-dealer registered under the Exchange Act
to sell Shares to an Acquiring Fund in excess of the limits of section
12(d)(1)(B).
11. All Acquiring Management Companies 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 an ``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.\11\ To limit the control that an 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 an Acquiring Fund Adviser or Sponsor, and any
investment company and any issuer that would be an investment company
but for sections 3(c)(1) or 3(c)(7) of the Act that is advised or
sponsored by an Acquiring Fund Adviser or Sponsor, or any person
controlling, controlled by, or under common control with an Acquiring
Fund Adviser or Sponsor (``Acquiring Fund 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 company or issuer that would be an investment company but
for sections 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 any offering of securities during the
existence of any 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, employee or Sponsor of an Acquiring Fund, or a person of
which any such officer, director, member of an advisory board,
Acquiring Fund Adviser, Acquiring Fund Subadviser, employee, or Sponsor
is an affiliated person
[[Page 45265]]
(except that any person whose relationship to the Fund is covered by
section 10(f) of the Act is not an Underwriting Affiliate.
---------------------------------------------------------------------------
\11\ An ``Acquiring Fund Affiliate'' is an Acquiring Fund
Adviser, Acquiring Fund Subadviser, Sponsor, promoter, and 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 a Fund and any person controlling, controlled by or
under common control with any of these entities.
---------------------------------------------------------------------------
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 directors or trustees who are not ``interested persons'' within
the meaning of section 2(a)(19) of the Act (``independent 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 or
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 an
Acquiring Fund will not exceed the limits applicable to a fund of funds
set forth in Conduct Rule 2830 of the National Association of
Securities Dealers (``NASD'').\12\
---------------------------------------------------------------------------
\12\ Any references to Conduct Rule 2830 of the NASD include any
successor or replacement rule to Conduct Rule 2830 that may be
adopted by the Financial Industry Regulatory Authority.
---------------------------------------------------------------------------
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. 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 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 Order
only to invest in the 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 an 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 Fund 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 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 through in-kind Creation
Unit Aggregation transactions with the Acquiring Fund.\13\ 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 Acquiring Fund for the purchase or redemption of Shares directly
from a Fund will be based on the NAV of the Fund.\14\ 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.
---------------------------------------------------------------------------
\13\ 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.
\14\ Applicants believe that an Acquiring Fund will purchase
Shares 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 Creation Unit
Aggregations by a Fund to an Acquiring Fund and redemptions of those
Shares.
---------------------------------------------------------------------------
[[Page 45266]]
Applicants' Conditions
Applicants agree that any order of granting the requested relief
will be subject to the following conditions:\15\
---------------------------------------------------------------------------
\15\ See note 4, supra.
---------------------------------------------------------------------------
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 or a Fund 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 each Fund, 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 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 the 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 the 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 the Acquiring Fund's Subadvisory
Group, each in the aggregate, becomes a holder of more than 25 percent
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 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 Acquiring Fund Affiliate and the Fund or a Fund
Affiliate.
9. The board of directors or trustees of an Acquiring Management
Company, including the independent directors or trustees, will adopt
procedures reasonably designed to ensure that the Acquiring Fund
Adviser and 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
limits in section 12(d)(1)(A)(i) of the Act, the board of directors or
trustees of a Fund (``Board''), including a majority of the independent
directors or 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 a Fund to purchase a security in any Affiliated
Underwriting.
12. The Board, including a majority of the independent directors or
trustees, will adopt procedures reasonably designed to monitor any
purchases of securities by the 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 the 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
[[Page 45267]]
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
determinations of the Board were made.
14. Before investing in Shares in excess of the limits in section
12(d)(1)(A), each Acquiring Fund and the Fund will execute an 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), an Acquiring Fund will notify the Fund of the
investment. At such time, the Acquiring Fund will also transmit to the
Fund a list of the 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
pursuant to any plan adopted under rule 12b-1 under the Act) received
from the 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 a Fund by
the Acquiring Fund Subadviser, or an affiliated person of the Acquiring
Fund Subadviser, other than any advisory fees paid to the Acquiring
Fund Subadviser 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 Conduct Rule 2830 of the NASD.
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.
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 Fund.
For the Commission, by the Division of Investment Management,
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-20983 Filed 8-31-09; 8:45 am]
BILLING CODE 8010-01-P
